The unplugged version: Elon Musk Vs ESG

The world’s richest person and top entrepreneur, Elon Musk, has described ESG, or the Environment, Social and Governance movement, as the “Devil.” An article published recently by The Washington Free Beacon had the following caption: “From S&P Global to the London Stock Exchange, tobacco companies are crushing Tesla in the ESG ratings. “How could cigarettes, which kill over eight million a year, be deemed a more ethical investment than electric cars?” 

To this, Musk responded: “(This is) Why ESG is the devil…”

While ESG ratings are intended to assess a company's sustainability and ethical practices, Musk's behaviour and statements have often put him at odds with ESG frameworks, causing controversy and raising questions about the effectiveness of these ratings. In this article, we will explore Elon Musk's problems with ESG ratings and the debates surrounding his stance.

How does Tesla rate on ESG?

Last year, the Tesla, SpaceX founder said ESG was a “scam” after his electric car company was ejected from the S&P 500 ESG index after only a year. 

Musk’s criticism of ESG stems from the fact that tobacco firms tend to receive higher ESG ratings than electric-vehicle maker Tesla. Musk highlighted a report that showed Tesla scoring only 37 out of 100 in S&P Global’s latest ESG rankings, while tobacco giant Philip Morris scored 84. The London Stock Exchange gave British American Tobacco an ESG rating of 94, and Tesla a more middling 65. 

MSCI (Morgan Stanley Capital International) that provides stock indexes, portfolio risk and performance analytics, and governance tools to institutional investors and hedge funds has been downgrading Tesla's ESG rating over time. In 2017, MSCI gave Tesla an ESG rating of "AAA," but it reduced the rating to "AA" in 2018 and "A" in 2022.

The reasons for the downgrades are:

•    Labour management: MSCI found that Tesla has had a number of problems with labour relations, including allegations of racial discrimination and poor working conditions.
•    Corporate governance: MSCI found that Tesla has a weak corporate governance structure, with a lack of independent directors and a CEO who has too much power.

ESG data can be noisy, which can lead to different rating agencies assigning different scores to the same company. Musk has argued that these ESG scores are flawed and do not accurately reflect Tesla's social contributions.

However, the ESG scores for Tesla from the above-mentioned agencies highlight some common challenges facing the company.

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The "S" in ESG 

Tesla is a leader in the electric vehicle industry, but it has fallen behind its peers when it comes to environmental, social, and governance (ESG) factors. ESG is a broad framework that assesses a company's performance on a variety of factors, including environmental impact, social responsibility, and corporate governance.

Tesla has been praised for its environmental impact, as its electric vehicles produce zero emissions. However, the company has been criticised for its lack of diversity and its treatment of employees. Tesla's board of directors is overwhelmingly white and male, and the company has been accused of unfair labour practices.

In addition, Tesla's CEO, Elon Musk, has been criticised for his support of cryptocurrencies, which have a significant carbon footprint. Musk has also been accused of making offensive remarks about women and minorities.
These criticisms have led some ESG rating agencies to downgrade Tesla's ESG score. While Tesla is a leader in the electric vehicle industry, it needs to do more to address its ESG shortcomings if it wants to be a leader in the 21st century.

ESG is not just about the environment. It is also about social responsibility and corporate governance. Tesla needs to recognise that ESG is a holistic framework. It cannot focus on just one factor, such as the environment, and ignore the others. If Tesla wants to be a leader for the 21st century, it needs to do more than just make electric cars. It needs to be a good company for all of its stakeholders.

One can’t live in a vacuum of just environmental or social issues – they are all intertwined.

ESG vs sustainability vs impact

Some, including Musk, argue that the ratings should recognise and reward companies that actively support the well-being of the planet and society. On the other hand, entities like S&P, who produce these ratings, maintain that the purpose of the ratings is to indicate the extent to which a company's stock faces risks from ESG (Environmental, Social, and Governance) factors. This is why companies like Exxon Mobil, which contribute significantly to climate change, are permitted to be part of an ESG index if they can demonstrate efforts to reduce that risk.

ESG and sustainability are distinct yet interconnected concepts. ESG serves as a framework for evaluating an organisation's legitimacy and competitiveness, focusing on performance assessment. Sustainability, on the other hand, operates as a management paradigm aimed at ensuring an organisation's long-term viability or "the business of staying in business."

ESG primarily centres around evaluating the risks and opportunities posed to companies by evolving social, environmental, and governance factors. In the United States, it primarily considers the impact of the world on the company, rather than the impact of the company on the planet.
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Effectively, Musk is conflating ESG with sustainability and impact. The issue with Musk's claims is that ESG is not concerned with impact but rather with operations. It provides a lens through which to assess how global events might jeopardise a company's enterprise value, rather than focusing on how a company itself may pose risks to the world. Hypothetically, if there were an S&P 500 Impact Index, Tesla would likely be included while Exxon Mobil would not. However, this does not mean that Tesla can automatically claim compliance with ESG principles.

Therefore, Musk is both correct and mistaken. Tesla has undoubtedly made significant contributions to addressing climate change, but ESG does not necessarily measure the aspects that Musk and others believe it does.

In the context of investors, instead of relying solely on generic ESG ratings, it would be advisable for them to first identify the specific ESG considerations that are most important to them and then select an investment strategy accordingly.

(Disclaimer: The views of the writer do not represent the views of WION or ZMCL. Nor does WION or ZMCL endorse the views of the writer.) 

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