Is it unreasonable for Tesla, Inc. to be excluded from the S & P 500 ESG index? First understand the method of compiling ESG index.
On May 18th, the S & P 500 removed electric carmaker Tesla, Inc. from its ESG (Environmental, Social and Corporate Governance) index. The official reason given by S & P is $Tesla(TSLA.US$The ESG score is too low to be selected (see chart).
The S & P 500 ESG index was removed from the list. Photo source: standard & Poor's Dow Jones Index Co., Ltd.
The S & P ESG is "based on a broad market capitalization weighted index designed to measure the performance of securities that meet sustainability criteria while maintaining the weight of the overall industry group similar to the S & P 500." As a leader in electric vehicles and energy enterprises, Tesla, Inc. 's entry into the S & P 500 ESG index is fully in line with market expectations.
The EPA's assessment of fuel economy shows that even if the electricity used by electric vehicles comes from power plants that emit a lot of carbon dioxide, from the perspective of energy economy, the contribution of electric vehicles to the environment is still much higher than that of fuel vehicles. Generally speaking, the power system of fuel vehicles can only convert 14% of the energy into power, compared with the energy efficiency of electric cars is much higher.
When Musk learned that Tesla, Inc. had been removed from the ESG index, he tweeted: "even Exxon $Exxon Mobil(XOM.US$(Exxon Mobil Corp, the global oil and gas giant) are among the top 10 environmental, social and corporate governance (ESG) in the world, but Tesla, Inc. is not on the list at all! "
To understand the decisions made by S & P, you need to understand how the index is compiled.
The S & P 500 ESG index is built. Photo source: standard & Poor's Dow Jones Index Co., Ltd.
The S & P ESG adjusts annually after trading closes on the last working day of April. It uses the S & P ESG score to rank companies from highest to lowest, aiming for the market capitalization of the selected companies to reach 75 per cent of the market capitalization of each GICS industry group in the S & P 500 broad-based index.
Step one: strip out companies with tobacco or controversial weapons or low UNGC scores.
Step two: strip out companies with S & P ESG scores in the bottom 25 per cent of the world's GICS industry group.
Step 3: rank the remaining companies in each GICS industry group according to the S & P ESG score in the S & P 500.
Step 4: start with the companies with the highest ESG scores in S & P, and select the companies to be included according to their scores, targeting 75 per cent of the market capitalization of the GICS industry group.
Step 5: weigh the company according to the current market capitalization.
(source: slap Global)
Weights vary according to different industry groups. For example, the medical effectiveness contribution, product quality and recall management of the pharmaceutical industry are key factors, while for the mining and mineral industries, considerations are mineral waste management, water-related risks and biodiversity.
Margaret Dorn, head of the North American ESG Index, said that Tesla, Inc. lacked a low-carbon development strategy and violated the code of business conduct, so his score fell to the bottom 25% and was removed from the constituent stocks. Even though Tesla, Inc. 's electric vehicles reduce greenhouse gas emissions, the overall ESG score lags behind.
Tesla, Inc. Dow Jones ESG score in 2021. Photo source: standard & Poor's Dow Jones Index Co., Ltd.
Even though the current market capitalization is much higher than that of eligible companies in the same category, Tesla, Inc. 's ESG score is the last.
In addition, ESG covers not only the environment, but also social and corporate governance. Tesla, Inc. 's ESG rating has been further affected by a number of security accidents and racial discrimination.
From April 2, 2013 to May 11, 2022, Tesla, Inc. had 219 fatal accidents worldwide, killing a total of 261 people, according to the Tesla Deaths website.
In October 2021, a black elevator operator Tesla, Inc. continued to encounter racial discrimination while working at a factory in Fremont, California, but his complaint was ignored by the company, so a jury in San Francisco awarded Tesla, Inc. $15 million. In addition, hundreds of employees complained that black workers were discriminated against in terms of pay, job distribution and promotion, and that the working environment was hostile.
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