Tesla shares fell more than six percent when S&P announced that Tesla would be removed from the ESG-500 list. The market fears that top managers such as Oil Fund and BlackRock will sell Tesla.
Elon Musk claims that S&P lost all integrity and credibility when oil and gas giant Exxon was ranked among the top ten ESG stocks in its index, while Tesla was excluded.
The ESG is concerned with environmental, social and governance issues (“Environmental”, “Social” and “Governance”).
Joachim Nahem (Photo: Christopher Olsen)
at Posted in DN 25 May NHH’s Ibrahim Plea gives a good analysis of the ‘flaws’ of ESG ratings He explains why Exxon, one of the world’s most polluting companies, ranks in the S&P rating. Any large company, whether it has oil recovery or recycling as a business model, must pursue significant risks associated with environmental, social and corporate governance standards. This is a requirement in the Norwegian Accounting Act and the US Financial Supervisory Authority, SECrecently proposed stricter reporting requirements for listed companies.
“ESG is the work of the devil,” Musk has stated — on Twitter of course — that “ESG is the work of the devil.” It is highly debatable, but what is certain is that the devil is in the details when it comes to ESG.
S&P’s justification for kicking Tesla out of the ESG is more accurate than the pitfalls Pelja highlighted:
- Inadequate reporting of carbon monoxide2Emissions, especially emissions in the value chain.
It doesn’t help that Tesla build zero-emissions cars if production and transportation are polluting. Battery production can also pose a natural hazard, as it requires the extraction of minerals, for example from large-scale cobalt mines.
Without climate-specific accounting or strategy, neither S&P nor investors can assess whether Tesla really has a sustainable business model.
- Accusations of racial discrimination and poor working conditions at the Tesla plant in Fremont, California. US authorities are also currently investigating Tesla regarding several accidents and deaths due to the autopilot function. Product safety and management conditions are also part of the ESG.
It should come as no surprise that a company that has no control over risk is downgraded. The fact that a company is “green” in an area does not guarantee that it is “green” or responsible for other things.
Musk, along with many others, is wrong when he says that ESG is for companies that rely on positive impact (“impact”), for example in the climate field. According to Musk, Tesla is a sustainable company because the business model is based on green technology – since electric cars provide positive climate change.
On the other hand, the S&P faces an explanatory problem when the index consists of companies that are good at accounting for risk, but have a negative impact on the climate and the environment, such as Exxon. Not only Musk, but also environmentalists like Greenpeace who believe the ESG fund is laundering money. The stock index providers – S&P, MSCI and others – are accused of focusing on corporate risk rather than the risks companies inflict on the environment, climate and people.
Norwegian small savers, through DNB, Storebrand and KLP, have invested billions in funds labeled “green” or environmentally friendly and corporate governance. They will probably be surprised that S&P’s ESG 500 list includes not only Exxon, but many other oil companies. Several studies show that there is not much difference between the underlying companies of ESG funds compared to other funds.
There is an urgent need to improve ESG ratings, but also to regulate what is defined as sustainable, as the EU classification aims. Until then, Musk and others who want to save the world must read the ESG analyzes that Satan is reading the Bible.
A good evaluation of ESG is often just a sign that companies are providing information about the environment, social and governance issues – not to what extent they influence it in a positive or negative direction.
Position Green (formerly Governance Group) publishes the annual Sustainability Report – an analysis of the sustainability reports of the 100 largest companies listed on the Oslo Stock Exchange.
Stock index providers are accused of focusing on corporate risks rather than the risks companies inflict on the environment, climate and people.
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