Tesla and the S&P 500 ESG Index:

Tesla is one of the most well-known (and controversial) American technology brands and the most valuable auto industry company in the world by market capitalization. In June of 2023, Tesla returned to the S&P 500 ESG index, a subset of the well-known S&P 500 index that includes companies with strong environmental, social, and governance (ESG) performance. In this article, we explore why Tesla was removed from the S&P 500 ESG index, why they returned, and whether they are a sustainable company.

What is the S&P 500 ESG index?

The S&P 500 ESG index is a market-cap-weighted index that aims to help investors identify companies that are leaders in sustainability by providing an ESG benchmark. Launched in April 2019, it applies a rules-based methodology to assess and score companies based on ESG criteria. It is intentionally broad and meant to include the top performers of each industry; the index includes over 300 of the original S&P 500 companies. The index is annually rebalanced on the last business day of April.

How Are Companies Evaluated for the S&P 500 ESG index?

In order to be included into the S&P 500 ESG index, companies are evaluated based on their S&P DJI ESG Scores, which in turn rely on data gathered through the annual Corporate Sustainability Assessment (CSA). The CSA grades corporations based on their sustainability progress and ESG performance in relation to their peers. Along with CSA data, S&P DJI ESG Scores also rely on publicly available sources and direct interaction with companies to collect up to 1,000 data points per company.

Are Tesla's Sustainable?  EGEA SRI Investment Group

Source: The S&P 500® ESG Index: Defining the Sustainable Core. S&P Dow Jones Indices LLC.

It’s important to note that a company’s score is based on the sustainability issues that are most relevant to them and their industry, or their material issues. This means that scores are normalized at the industry level to accurately compare a company to its peers and to maintain similar overall industry group weights as the S&P 500.

In addition,companies are excluded that

  • Have a low S&P DJI ESG Score in their industry group
  • Extract or generate electricity from thermal coal accounting for greater than 5% of their revenue
  • Derive more than 5% of their revenue from tobacco-related products and services
  • Are involved in controversial weapons
  • Are involved in the manufacturing of, have more than 5% revenues from the sale of, or hold more than a 25% stake in a company involved in small arms
  • Manufacture military weapon systems
  • Have greater than or equal to 5% revenue coming from oil sands extraction
  • Are deemed non-compliant in accordance with the 10 principles of the United Nations
  • Global Compact (UNGC)

Why Did Tesla Return to the S&P 500 ESG index?

In May 2022, Tesla was removed from the index. According to a blog post from Margaret Dorn, Senior Director of ESG Indices, North America at S&P Dow Jones Indices, she cited

  1. A lack of low carbon strategy,
  2. Lack of transparency regarding codes of business conduct,
  3. The increased risk exposure stemming from racial discrimination and poor working conditions at Tesla’s Fremont factory.
  4. And the increased risk exposure from the company’s handling of ongoing National Highway Traffic Safety Administration (NHTSA) investigations into the growing number of deaths and injuries linked to Tesla’s autopilot vehicles. A recent Washington Post article cited 736 U.S. crashes involving Teslas in Autopilot since 2019.

Dorn stated that, “while Tesla may be playing its part in taking fuel-powered cars off the road, it has fallen behind its peers when examined through a wider ESG lens.”

Tesla returned to the index this year largely due to environmental disclosures. According to a recent Reuters report, “Tesla gave information about its assessment of physical climate risks and of ESG considerations in its supply chain management strategy.” However, S&P mentioned a review underway related to recent lawsuits targeting working conditions at Tesla, which may impact Tesla’s future ESG scores.

Is Tesla a Sustainable Company?

Sustainability can mean a lot of different things, and with so many factors considered in evaluating companies and determining ESG scores, it can be difficult to recognize which businesses are actually sustainable.

Tesla secured its reputation as a top automobile manufacturer through its development of electric vehicles (EVs), which are considered a key factor in our journey towards a green future. However, while EVs produce no tailpipe emissions, there are sustainability concerns related to the mining and minerals needed to create an electric vehicle, such as cobalt from conflict regions such as Congo. Then again, many industries, especially technology industries, rely heavily on mining, and many modern gasoline-powered vehicles are equipped with electronics that require similar minerals and metals. Tesla recently announced its plan to bring an electric motor to market that requires no rare earth elements.

It’s up to each individual to weigh social, environmental, governance, and economic factors in accordance with their own set of values in order to determine whether any company is sustainable. However, according to the S&P 500 ESG index methodology, Tesla is sustainable enough to be once again included in the index, and the company has notable inclusions in other ESG benchmarking indexes, such as the MSCI World SRI Index where it is the second largest constituent.

Investing Sustainably: Getting Started

For the average individual, it’s difficult to understand all the nuances of sustainable investing. Even for professionals, it’s hard to keep up with ESG ratings and changing regulations and requirements. Egéa SRI is one of the few financial firms completely focused on socially responsible investing. Our financial counselors are certified and chartered in sustainable, responsible and impact investing (SRI), and our small business can help provide the personalized help and support you need. Whether you’re looking for sustainable stock recommendations, a better understanding of ESG, or want us to align and manage your investments to match your values, contact us to get started investing sustainably today!