Elon Musk called a prominent index of socially responsible companies a “scam” on Wednesday after it dropped Tesla because of the way the carmaker handled accusations of racial discrimination at its factory in California.
The S&P 500 ESG Index, a listing of companies that meet certain environmental, social and governance standards, removed Tesla last month. But the decision to eject the world’s largest maker of electric vehicles from a club that includes oil producers like Exxon Mobil attracted little notice until S&P Global, which manages the index, offered an explanation this week.
S&P cited claims of racial discrimination and poor working conditions at Tesla’s factory in Fremont, Calif.. Those claims have prompted a California state agency to file a lawsuit, which Tesla is contesting. S&P said its decision was also influenced by Tesla’s handling of an investigation by the National Highway Traffic Safety Administration after multiple deaths and injuries were linked to the company’s driver-assistance system, known as Autopilot.
“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 E.S.G. lens,” Margaret Dorn, head of E.S.G. indices in North America at S&P, said in the firm’s explanation.
Tesla stock was the fourth most heavily weighted in the index before it was removed, behind Apple, Microsoft and Amazon. Funds that track the index were obligated to own Tesla shares when it joined the index in May 2021 and to sell them when it was booted off.
Exxon Mobil is the ninth most heavily weighted stock in the index, prompting a blast from Mr. Musk. “Exxon is rated top ten best in world for environment, social & governance (ESG) by S&P 500, while Tesla didn’t make the list!” he wrote on Twitter. “ESG is a scam. It has been weaponized by phony social justice warriors.”
S&P did not immediately respond to a request for comment on why Exxon made the list and Tesla didn’t.
Tesla has previously faced criticism from investors who say it has released little information about the impact of its manufacturing or labor practices.
“Elon has branded himself and the entire company on the importance of environmental sustainability,” said Kristin Hull, the founder and chief executive of Nia Impact Capital, a fund in Oakland, Calif., that invests in companies with a positive social impact. Yet, Dr. Hull added, Tesla has been stingy with information about its water use or how it sources materials used in batteries.
“You can’t have a racial equity lawsuit and be considered a top E.S.G. name,” she added.
Passive index funds, which collectively direct about a third of all the assets invested in the stock market, are required to match their portfolios to the index they track.Getting included in or removed from an index can impact a company’s stock price. General Electric’s shares, for instance, fell 3 percent shortly after it was announced in mid-2018 that the company, an original member of the Dow Jones industrial average, was being removed from that index.
But the drop in Tesla’s share price of more than 30 percent since the end of March was more likely the result of concern about Mr. Musk’s offer to buy Twitter and a broader shift in how investors view technology stocks.
How Elon Musk’s Twitter Deal Unfolded
A blockbuster deal. Elon Musk, the world’s wealthiest man, capped what seemed an improbable attempt by the famously mercurial billionaire to buy Twitter for roughly $44 billion. Here’s how the deal unfolded:
The initial offer. Mr. Musk made an unsolicited bid worth more than $40 billion for the influential social network, saying that he wanted to make Twitter a private company and that he wanted people to be able to speak more freely on the service.
The response. Twitter’s board countered Mr. Musk’s offer with a defense mechanism known as a “poison pill.” This well-worn corporate tactic makes a company less palatable to a potential acquirer by making it more expensive for them to buy shares above a certain threshold.
Securing financing. Though his original offer had scant details and was received skeptically by Wall Street, Mr. Musk has been moving swiftly to secure commitments worth $46.5 billion to finance his bid, putting pressure on Twitter’s board to take his advances seriously.
Striking a deal. With the financing in place, Twitter’s board met with Mr. Musk to discuss his offer. The two sides soon reached a deal, with the social media company agreeing to sell itself for $54.20 a share.
Will the deal go through? For the purchase to be completed, shareholders have to vote and regulators have to review the offer first. Scrutiny is likely to be intense and questions remain about Mr. Musk’s plans for the company, especially after he suggested he needs more information on spam and fake accounts on Twitter for the deal to proceed.
S&P reported that there were $65 billion in assets invested in funds tied to its E.S.G. index at the end of December 2020, the most recently available figure. That’s far smaller than the $13 trillion that is in funds tied to the more widely followed S&P 500 index, of which Tesla remains a member. That $65 billion is also small compared to Tesla’s overall market value of nearly $750 billion. And only a portion of the holdings of those E.S.G. funds are in Tesla.
What’s more, of the $65 billion tied to the E.S.G. index, only $11 billion of that money is invested in passive index funds, which would be required to sell their Tesla stakes. The rest of the money is in funds that benchmark their performance against the S&P 500 E.S.G. index. Many of those funds are actively managed by portfolio managers. Those funds aren’t required to sell their Tesla holdings, but they might do so in order to not deviate too far from the index that they are compared to by investors.
“Tesla is just simply not an open-and-shut E.S.G. case,” said Jon Hale, who directs sustainability research at mutual fund tracking firm Morningstar. “While it’s clear the company’s product is beneficial to the environment, Tesla is now a big company and it also has an impact on employees and customers, and those issues concern E.S.G. investors.”
Several other prominent companies were also dropped from the index in April when S&P determined they no longer met the criteria for membership. They included Chevron, Delta Air Lines, Home Depot and News Corp.
Even if ejections do not impact the value of a company’s shares, they could have an impact on a company’s actions. “Elon Musk and Tesla may be the exception,” Mr. Hale said. “But the flip side of that is very few companies want to be E.S.G. laggards in the current environment.”
