S&P recently removed Tesla from its ESG index, citing concerns around its lack of low carbon strategy and business conduct as well as involvement in controversial incidents. Specific issues around racial discrimination and poor working conditions at a Tesla factory were also cited. The removal was part of its regular annual rebalance, which also left oil and gas giant Exxon Mobile in its top 10 holdings.
While, we do not dismiss these largely social and governance issues related to the quality of Tesla’s operations, and we certainly believe Tesla has room for improvement around human capital management and governance, the removal from the index highlights the challenges mainstream ESG is currently facing. ESG and sustainable investing should be focused on identifying issuers who are helping to foster sustainable economic growth and create a more sustainable environment and society. In order to identify these issuers, we must focus not only on how the companies themselves are operating in terms of the quality of their ESG practices, but also on what the issuers themselves are contributing to sustainable development. This is often times the missing piece in mainstream ESG analysis, making investors fail to see the forest for the trees. It is this approach that lends itself to the removal of Tesla and the inclusion of Exxon in an ESG Index. This is also the approach that Elon Musk is critical of in his harsh comments on ESG. As stated in Tesla’s 2021 Impact report “Current environmental, social and governance (ESG) reporting does not measure the scope of positive impact on the world…We need to create a system that measures and scrutinizes actual positive impact on our planet.” (source: Tesla 2021 Impact Report) The Candriam ESG philosophy is focused on actual positive impact, due to its four-pillar approach of controversial activity analysis, norms based analysis, stakeholder analysis, and the typically forgotten business activity analysis. Business activity analysis is simply the process of determining the contribution of an issuer’s products and services to key sustainability challenges such as climate change. In the case of Tesla, this is what is neglected in S&P’s process which is largely focused on controversies and the how, or what Candriam defines as stakeholder analysis. Incorporating business activity analysis allow us to see the bigger picture or the forest for the trees. Let’s take a look at Tesla and Exxon. Tesla, a disruptor in the automotive sector and leading provider of EVs, battery and solar technologies, has massively contributed to the future sustainability of our global society, playing a significant role in the world’s transition to a lower carbon economy. This is because its business activities are key contributors to climate related solutions. This is despite how Tesla is operating, or its weaker stakeholder practices. All of that said, we would encourage improvements in human capital management and governance and are actively monitoring any severe controversies. Now let’s compare and contrast that with Exxon, while Exxon may be making strides in how it treats its stakeholders, or the quality of its operations, in terms of its big picture impact and contribution to a more sustainable society, it lags far behind Telsa. <As ESG becomes more and more of a hot topic issue, we must do it justice and remember its underlying purpose – investing in sustainable issuers, which seek to provide sustainable financial returns while simultaneously driving solutions to a more sustainable global society.