Tesla CEO Elon Musk has come out strongly against Environment, Social, and Governance (ESG). 

“Exxon is rated top ten best in world for environment, social & governance (ESG) by S&P 500, while Tesla didn’t make the list! ESG is a scam. It has been weaponized by phony social justice warriors,” Musk tweeted

He added, “@SPGlobalRatings has lost their integrity.” 

His comments come after S&P Global downgraded Tesla from their ​​S&P 500 ESG Index.  

An S&P company blog post claims the electric vehicle (EV) company isn’t sufficiently decarbonizing, among many other factors behind its removal from the list: 

A few of the factors contributing to its 2021 S&P DJI ESG Score were a decline in criteria level scores related to Tesla’s (lack of) low carbon strategy and codes of business conduct. In addition, a Media and Stakeholder Analysis, a process that seeks to identify a company’s current and potential future exposure to risks stemming from its involvement in a controversial incident, identified two separate events centered around claims of racial discrimination and poor working conditions at Tesla’s Fremont factory, as well as its handling of the NHTSA investigation after multiple deaths and injuries were linked to its autopilot vehicles. Both of these events had a negative impact on the company’s S&P DJI ESG Score at the criteria level, and subsequently its overall score. 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 hit back against S&P Global, with their 2021 Impact Report, writing, “Current environmental, social and governance (ESG) reporting does not measure the scope of positive impact on the world. Instead, it focuses on measuring the dollar value of risk / return. Individual investors — who entrust their money to ESG funds of large investment institutions — are perhaps unaware that their money can be used to buy shares of companies that make climate change worse, not better.”

My colleague, IWF Policy Analyst Charlotte Whelan, has explored ESG in great detail. She describes it as follows:

“ESG” is a set of criteria that measures a business’s commitment to Environmental, Social, and Governance (ESG) principles. Often, these take the form of environmental sustainability practices, social justice issues, and democratic and fair corporate governance.

However, incorporation of ESG principles can come in many forms. Some forms are commendable, such as pledging to not use products made by slave labor, while others are misguided, like committing to net-zero carbon emissions even though we lack the technology to make that a sound financial or realistic goal.

Musk isn’t the only heavy-hitter to criticize these principles. 

Recently, BlackRock’s former sustainable investing chief, Tariq Fancy, dedicated a long essay to ESG calling it a “dangerous placebo.”

Green bonds, where companies raise debt for environmentally friendly uses, is one of the largest and fastest-growing categories in sustainable investing, with a market size that has now passed $1 trillion. In practice, it’s not totally clear if they create much positive environmental impact that would not have occurred otherwise, since most companies have a few qualifying green initiatives that they can raise green bonds to specifically fund while not increasing or altering their overall plans.

After reading a few pro-ESG papers whose methods and conclusions I found rather dubious, something occurred to me: there’s always money to be made from telling people what they want to hear.

Moreover, in financial terms, ESG investments aren’t as profitable as advertised. 

Harvard Business Review notes, “To begin with, ESG funds certainly perform poorly in financial terms. In a recent Journal of Finance paper, University of Chicago researchers analyzed the Morningstar sustainability ratings of more than 20,000 mutual funds representing over $8 trillion of investor savings. Although the highest rated funds in terms of sustainability certainly attracted more capital than the lowest rated funds, none of the high sustainability funds outperformed any of the lowest rated funds.”

To learn more about ESG principles, go HERE.