In the realm of sustainable investing, Tesla Inc.’s place is once again under scrutiny. Amidst its first year-over-year sales decline since the early days of the pandemic, questions arise about its suitability for ESG-focused funds. Despite being a major player in electric vehicles, CEO Elon Musk’s controversial statements and management style cast shadows. With analysts divided, Tesla’s ESG status remains a fiercely debated topic, shedding light on broader dilemmas within sustainable finance.
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By Tim Quinson
The debate about whether Tesla Inc. belongs in ESG-focused investment funds is resurfacing again. And it’s emerging during a week when the company posted its first year-over-year sales drop since the early days of the Covid pandemic. Its stock plummeted Tuesday on the news. ___STEADY_PAYWALL___
Two years ago, Tesla was removed from a market benchmark—the S&P 500 ESG Index—mainly because of concerns about workplace-related issues. Tesla was put back into the index last year after it provided additional disclosures about its hiring practices, climate risks and supply-chain strategy.
Tesla is one of the world’s largest makers of electric vehicles, which would make one think it’s a shoo-in for inclusion in an environmental, social and governance index widely seen as favoring companies driving the shift away from fossil fuels.
But there are questions about the company’s chief executive, Elon Musk, and his sometimes erratic management style. Musk, who has turned politically to the far right in recent years, says he doesn’t care about ESG. In fact, he has called it a “scam.”
In a web post filed in 2022 after Tesla was ejected from the S&P index, Musk wrote that ESG “has been weaponized by phony social-justice warriors.” However, he also questioned — and not unreasonably so — how Tesla could be pulled from the index at the same time S&P gives Exxon Mobil Corp., one of the world’s largest polluters, a top ESG rating.
And that brings us to now. Analysts at Bloomberg Intelligence issued a report last week saying Tesla’s ESG standing “remains among the most debated for any stock.”
The analysts reviewed the 15 largest ESG-focused funds based in the US and found that nine of them hold the company’s stock. That simple math means six managers of the biggest ESG funds are avoiding Tesla.
“In conversations with people, Tesla’s ESG status depends on who you ask,” said Shaheen Contractor, senior ESG analyst at Bloomberg Intelligence. “Some favor the company based on its environmental prowess, while others question its governance credentials.”
Among S&P 500 stocks, Microsoft Corp., Alphabet Inc. and Nvidia Corp. are the most widely held by managers of the largest ESG funds, followed by Mastercard Inc. and Salesforce Inc.
By contrast, the managers are shying away from Meta Platforms Inc., Southwest Airlines Co. and CoStar Group Inc., according to the BI research. Exxon Mobil also is among the stocks that show up less frequently in ESG funds.
Meantime, managers of the 15 largest funds totally avoid S&P 500 stocks such as Philip Morris International Inc., Boeing Co., AES Corp. and Southern Co..
And that returns the discussion to Tesla. The bottom line is the company is a favored choice for managers of many ESG funds, based on the company’s “conviction score,” which ranks 24th among S&P 500 companies, Contractor said. That score looks at the popularity of a company among managers of ESG funds.
As it happens, however, Tesla investors are currently going through an uncomfortable period, regardless of the company’s ESG status. Tesla shares have dropped 33% in value since the start of the year, as waning demand for electric vehicles and elevated interest rates take a toll on sales.
As for the huge drop in sales, Tesla blamed it in part on its changeover to an upgraded version of the Model 3 sedan, Red Sea-related shipping delays and the suspected arson attack that cost it days of production in Germany.
But some on Wall Street see a bigger reason: Musk himself.
“Anyway you put it, it was ugly,” said Gene Munster, managing partner of Deepwater Asset Management. “Is Elon’s brand damaging Tesla sales in the US? It’s directionally a negative.”
Sustainable finance in brief
Private credit managers are doing significantly more fossil-fuel deals now than just a few years ago, stepping into a void left by banks exiting assets they worry pose too big a climate risk. The value of private credit deals in the oil and gas industry topped $9 billion in the 24 months through 2023, up from $450 million arranged in the preceding two years. The figures offer the clearest signal yet that fossil-fuel exclusion policies among banks — driven by regulatory and public relations concerns — are shifting some oil, gas and coal assets to less transparent corners of the market. It’s a trend that investors say is only going to increase in the coming years.
- The world’s biggest banks are quietly hanging on to carbon-intensive clients because of what they see as unrealistic demands from regulators and civil society — and the threat to their fees.
- Citigroup said more than a third of its clients in the energy sector don’t have a clear plan on how they’ll reach net zero.
- The world’s largest oil companies are staking claims far from home — this time to swallow, rather than spew, planet-warming industrial emissions.
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© 2024 Bloomberg L.P.
