Ross Kerber, Simon Jessop

LONDON/BOSTON – Elon Musk’s dismissal of ESG scores as a fraud highlights how Wall Street’s hottest investment trend, which includes some $35 trillion worth assets, means different things for different people.

The chief executive of Tesla (NASDAQ:) Inc lashed out on Wednesday against S&P Global (NYSE:) Inc after the electric car maker was dropped from its flagship ESG index while it added some companies whose activities are harmful to the environment, such as oil and gas producers.

Musk expressed his disappointment on Twitter by stating that Tesla had done more to protect the environment than any other company. Musk also stated that ESG had been “used by fake social justice warriors.”

S&P Dow Jones Indices senior director Margaret Dorn told Reuters that Tesla had been excluded from the index because its score declined slightly just as the scores of other automakers had improved. Tesla was not excluded because S&P executives decided to kick the company out of the index over a particular issue, she added.

Although Tesla cars have lower carbon emissions than its competitors, their ESG score was “lower” due to poor conditions in its U.S. Fremont plant, claims of racism and the handling of an investigation by the U.S. Government into multiple injuries and deaths related to its autopilot technology.

According to the Global Sustainable Investment Alliance, sustainable investing, which takes into consideration ESG factors when selecting portfolios, has seen a huge increase in recent years. It reached $35.3 trillion at the beginning of 2020.

Half a dozen investment managers interviewed by Reuters said Musk’s spat with S&P illustrates how confusion still reigns over how many investors and executives view the industry.

Musk is one of those who believes that the rating system should be used to reward the companies which do the best for society and the environment. Others, including firms like S&P that produce the scores, say they are meant to show how much risk a company’s stock faces from ESG factors.

Exxon (NYSE 🙂 Corp is one example of a company that contributes significantly to climate change. However, they may be allowed to remain in the ESG index if it can prove that they have taken steps to mitigate that risk.

ESG can be described as a method of quantifying and identifying risk. It’s risk mitigation.” Chi Chan, Federated Hermes portfolio manager (NYSE:), stated that ESG is basically about risk identification. Musk effectively conjures ESG and sustainability.

Toscafund Hong Kong’s chief investment officer Mark Tinker said Musk had “rightly” pointed out that social and corporate governance considerations were being used for “political driven cancelling”, and that companies can contribute to the environment in ways that “mean what they want.”

Tinker declared, “The whole thing can be very subjective.”

Tesla or Musk didn’t respond to my request for comment.

S&P published the change in its ESG index on April 22. However, it wasn’t until May 18, one day after Horn published a blog post explaining why Tesla had been excluded from its ESG index. Twitter users then started spreading the information and catching Musk’s interest.

Only a tiny fraction of the ESG’s industry’s assets under management – $11.7 billion as of the end of 2020 – are tied to S&P Indexes. S&P’s influential ESG index rival MSCI Inc has so far kept Tesla in its bluechip ESG index.

It was not immediately clear if the exclusion from the S&P ESG index had any impact on Tesla’s shares this week. Since April 1, the stock was already sliding nearly every day, losing 40%. This is due to concerns about China’s COVID-19 lockdowns that could disrupt Tesla’s production, as well as a possible economic slowdown, raging inflation, and dampening demand.

Musk’s $44 Billion acquisition remains uncertain Twitter Inc Tesla stock has been impacted by (NYSE:).

SCORE BREAKDOWN

S&P declined to provide a breakdown of its ESG score of Tesla, which is compiled based on scores of the company’s various operations and practices.

MSCI did not provide a breakdown. A May 3 copy sent by Reuters of its Tesla rating to investors, and reviewed by Reuters, shows how the perceived company’s poor social performance has taken away from the strong green credentials.

Tesla received 9.1 points out of 10 for environmental reasons, compared to the industry average of 6.5. The 30% figure was the ESG portion of Tesla’s total score. It ranked at 1.4 on social issues, compared to an average score of 3.5. Governance, however, scored 5.1, against an average score of 3.2.

Andrew Poreda (senior vice president at Sage Advisory Services), an Austin-based investment company, stated that he was a Tesla shareholder and understood the reason why ESG scores for the company were lower than they would have been if he had only focused on their contribution to combating climate change.

Poreda explained that it is impossible to live without social or environmental issues.