Tesla’s Removal From S&P Index Sparks Debate About ESG Ratings

A benchmark ESG stock index has removed Tesla Inc., sparking a debate about which companies do — and don’t — pass muster with socially aware investors.

Tesla has grown into a $735 billion company on the back of its breakthrough electric-vehicle engineering. Its own carbon footprint is a small fraction of its peers, and its success in the market has pushed the industry overall away from gas-powered vehicles.

But the other components of ESG — the social and governance risks — give investors pause. Chief Executive Officer Elon Musk is an unconventional manager, prone to impulsive tweeting, and the company discloses very little information about its workforce or labor conditions.

That split became material Wednesday after it emerged that Tesla was expelled from the ESG version of the S&P 500 Index. Musk responded by saying ESG is “a scam.” It added to an already bad day for the company, whose stock fell 6.8% amid a broad selloff in tech shares.

“This all speaks to the big inconvenient fact about ESG: You can’t keep the baby and throw out the bathwater,” said Eric Balchunas, senior ETF analyst at Bloomberg Intelligence. “You have to accept or reject both.”

In a report, analysts at Bloomberg Intelligence wrote that Tesla’s ESG status remains among the most debated for any company, with many ESG-labeled funds still holding the stock. In fact, the world’s largest ESG-focused exchange-traded fund has about 1.8% of its assets invested in Tesla, according to data compiled by Bloomberg.