It would make sense that the growth of environmental, social, and corporate governance (ESG) funds would benefit an EV automaker like Tesla (TSLA). But why isn't its stock getting an even bigger lift from ESG asset managers?
Short answer: Not everyone in the business of socially responsible investments is convinced that Tesla, and its controversial founder and CEO, Elon Musk, is a pure play in the ESG world.
To be sure, Tesla and its stock has made a lot of headway.
“What they’re doing is they’re positioning themselves as not only the key stock in everyone’s ESG portfolio, but also a vertically integrated market,” Ray Wang, principal analyst and founder of Constellation Research, said on Yahoo Finance Live (video above).
Wang added that due to Tesla's in-house production of components like batteries, the stock could see a boost from the transition to electric vehicles: “With the mandates that are coming to get to [electric] vehicles, depending on the state and the country where you are, they’re in a very good position to be able to ramp up production.”
Furthermore, Tesla stock is, at a glance, ESG-popular. Its shares are found in two of the top three ESG funds by assets under management — the iShares ESG Aware MSCI USA ETF and Vanguard FTSE Social Index Fund — according to a 2021 MSCI report.
But Tesla's bona fides in the sustainable funds business has come under scrutiny amid debate about what constitutes ESG and its true impact in the real world. An analysis from Bloomberg found that Tesla ranked 46th among S&P 500 companies for inclusion in funds that focus on issues like sustainability and diversity, highlighting that while investors place Tesla in the top 10% of companies for ESG, they still perceive risks in Tesla's strategy.
Good Tesla; bad Tesla
On the surface, Tesla seems like an easy pick for ESG-oriented portfolio managers. The electric vehicle company arguably has done more than any other automaker to jumpstart the shift away from gas-guzzling vehicles to electric ones, dominating 68% of the U.S. electric vehicle market.
Moreover, Tesla's ability to scale deliveries demonstrates a step in the right direction in the fight against climate change. Lowering carbon emissions is built into Tesla's business model and products that range from vehicles to solar panels.
But under the hood, there are other aspects of the company that look less favorable to investors focused on sustainability and good corporate behavior.
Here's what is holding Tesla back in the ESG investing world. For instance, the company lagged behind other automakers in providing information about its greenhouse gas emissions, first disclosing its emissions from operations and energy usage in May 2022 in the company's annual impact report. Three months earlier, corporate climate watchdog As You Sow had given Tesla an "F" rating for failing to set disclosures, targets, or track performance on reducing carbon emissions.
In comparison, General Motors, which received a "D" grade from As You Sow, began reporting all carbon emissions in 2013 and pledged to go net zero in January 2021.
It also doesn't help that Tesla is just a tad hostile towards the concept of ESG and folks who rate such things. Tesla's 2021 sustainability report, released in May 2022, starts by taking aim at the ESG framework itself: "Current ESG evaluation methodologies are fundamentally flawed. To achieve acutely-needed change, ESG needs to evolve to measure real world Impact...It’s easy to see why some oil & gas companies rank higher than Tesla on 'Environmental Impact.'"
The friction between Tesla and ESG raters came to a head last May when the S&P 500 ESG ETF booted Tesla from its holdings while also picking up shares of Exxon Mobil, a longtime public climate change denier. Although S&P didn't comment on why it chose to include Exxon, it is most likely due to the fund's objective, which maintains S&P 500 industry weighting.
In a blog post about the fund's rebalancing, Margaret Dorn, senior director and head of ESG indices North America for S&P Dow Jones Indices, cited Tesla's comparative rankings against its peers as well as the company's controversies over racial discrimination and Autopilot safety issues as reasons for the change. Tesla's ESG score remained steady, but the scores of its peers improved.
"While Tesla may be playing its part in taking fuel-powered cars off the road, it has fallen behind its peers when examined through a wider ESG lens," Dorn wrote.
That didn't sit well, of course, with Elon Musk, who called ESG "an outrageous scam" in a tweet. Like Musk, Tesla defenders turned the removal of the company from the S&P's ESG index into a referendum on ESG itself and its complex array of factors.
While the company has improved its transparency on emissions and diversity, in part due to agitation from ESG investors, Tesla will remain one of the more contentious stocks in the ESG investing environment. Just like its founder.
Grace is an assistant editor for Yahoo Finance.