Learning from Tesla’s Removal from S&P 500 ESG Index
By: James Kallman and Bahtiar Manurung
(This article was published in The Jakarta Post paper edition, 21 June 2022)
Despite its rocky history, Tesla is now a leading electric vehicle (EV) manufacturer, estimated to be worth US$ 1 trillion. The company’s success is, in part, attributed to their product’s high-tech features and increased consumer and government demands that automobile manufacturers do their part to fight against climate change.
And because of the company’s achievements and innovative spirit, Telsa is in an excellent position to help the European Union and countries like the United States meet their goals of putting more electric-powered vehicles on the road by 2030.
Tesla’s lucrative business portfolio has also attracted the Indonesian government. Last month, President Joko “Jokowi” Widodo met Tesla’s CEO Elon Musk at his SpaceX base in Boca Chica, Texas, to discuss potential investments, innovation, and technology.
While the meeting did not produce an Indonesia-Tesla partnership, future Tesla investment in Indonesia remains possible, especially as Indonesia is the world’s largest producer of nickel, a critical element in EV batteries.
However, the company has not operated without legitimate criticism. In recent years, Telsa has been accused of allowing racial discrimination and poor working conditions at its Fremont Factory, as well as lacking a low carbon strategy and codes of business conduct. The claims are so troubling that Tesla was removed from the widely accepted S&P 500 ESG Index.
In a blog post, Margaret Dorn, the executive in charge of ESG (environmental, social and governance) ratings for North America, said that Tesla no longer met the criteria for the index as its S&P DJI ESG score fell to the bottom 25 percent of its global-industry peers. And although Tesla is doing its part to eliminate fossil-fuel cars, “it has fallen behind its peers when examined through a broader ESG lens”.
While many other tools track a company’s performance, the S&P 500 ESG Index and Tesla’s removal from it should not be deemed insignificant. The index is widely used by investors who aim to align their investment objectives with their ESG values as it excludes S&P 500 companies with low United Nations Global Compact scores and low ESG scores in their global peer group.
That said, ESG indices, including the S&P 500 ESG index, are not without their own problems. The ESG ratings, which are the foundation of ESG indices and present a company’s score based on an assessment of its performance on multiple ESG issues, are not based on a standardized methodology.
ESG rating agencies create their own methodologies for measuring and weighing ESG aspects, influenced by their specific perspectives. As a result, interested parties may misrepresent a company’s ESG performance and commitment if they do not utilize multiple sources of information for decision-making processes.
Governments and international bodies can minimize the ESG-rating problem by offering guidance, passing regulations, or instituting stricter parameters for rating agencies. Until that happens, and to avoid such pitfalls as Tesla experienced, companies can ensure a more accurate ESG rating and standing on the ESG index by improving their ESG performance and reporting.
This is relevant for companies in the US, the EU, Indonesia, and elsewhere as investors increasingly consider ESG ratings when making investment decisions. Tesla’s removal from the S&P ESG Index and its dwindling share price sends a message that private and state-owned companies must fulfil all three pillars of ESG in order to improve their ESG performance.
They should be treated as integrated components as opposed to isolated ones. And since it will be nearly impossible for companies to work on all ESG issues, they should focus on those issues that are most material for them. They should center their ESG strategy around topics most relevant to their business and sector.
However, it is worth noting that some ESG issues are relevant to almost every businesses. Greenhouse gas (GHG) emission reduction, for instance, poses a risk to all companies. As such, companies must seek to reduce their GHG footprint and set GHG reduction goals to align with the objectives outlined in the Paris Agreement – limiting global warming to 1.5 degrees Celcius above pre-industrial levels.
Companies must also address labor, occupational health and safety, and human rights issues such as gender equality and discrimination. They should also carry out human rights due diligence to identify the comprehensive adverse human rights impacts stemming from their direct or indirect operations, and address these impacts starting from the most significant.
In the area of governance, companies must understand that their business ethics, board compositions, and independence are important factors. Deficiencies in a company’s management could have short- and long-term consequences, including damage to reputation and ESG score.
For instance, the US Securities and Exchange Commission (SEC) accused Musk, of making “false and misleading” statements to investors after he announced via Twitter that he had secured funding for a private buyout of Tesla.
His comments never materialized and caused the company’s stock to go into a “period of volatility”. As a result, Musk was temporarily removed from his position as chairman of Tesla’s board, and Tesla had to pay a $20 million fine.
Additionally, company leadership must set clear ESG goals and achievable targets. An organization’s ability to meet its targets is more likely to improve its ESG score than one that merely lists them on paper.
Finally, companies must introduce accountability mechanisms to ensure the board’s commitment to achieving the ESG goals.
Avoiding Tesla’s pitfalls is not one-size-fits-all and may very well require action beyond what has been presented thus far.
However, transparency is key. Most rating agencies rely on publicly available ESG information found in a company’s sustainability, ESG and/or annual reports to determine the appropriate ESG score.
Responsible investors also rely on this information to verify the findings of ratings providers. Therefore, these reports should be made available to the public and easily accessible from a company’s website.
Lastly, these reports should be prepared in a format that adheres to global sustainability reporting standards and frameworks, and verified by an independent assuror that will increase the reliability of the reports.
James Kallman is the CEO of Moores Rowland Indonesia and Bahtiar Manurung is the Operations Director of Foundation for International Human Rights Reporting Standards (FIHRRST).