S&P 500 Boots Out Number One Electric Vehicle Maker In The World – Tesla

Mid last week the S&P500 booted the number one electric vehicle maker in the world, Tesla, off its ESG Index as part of its annual reconstitution.  Yes, you heard that right.  They deemed Tesla, ESG unworthy.

I’m Chris Perras, Chief Investment Officer with Oak Harvest Financial Group. And This is our investment team’s mid-week release when we examine a news item, headline, or story making the rounds from publicly available sources and ask, “Is it News or Noise?” This week’s topic is last week, the braintrust behind the S&P500 ESG Index gave Tesla the boot and kicked them off their list and out of their ESG Index.

I remind everyone that Tesla is currently the largest electric vehicle maker in the world.  The largest by a wide margin.  While we do not specifically screen for ESG parameters in our investment process at Oak Harvest, we do follow what is going on in that arena. Theoretically, ESG screening considers highly qualitative factors such as environmental, social, and governance policies of companies.  Firms like Morningstar and S&P Global try to quantify these 3 factors into a “data” set, throw that data into an equation in an excel spreadsheet, and rank corporations on a sliding scale.

The ESG criteria are supposed to include hundreds of things including the way a company may affect the planet and how the company treats stakeholders beyond its shareholders.  This means outsiders, compiling ESG scores try to quantify how a company treats employees, customers, vendors, and business partners.  In the mater of Tesla, the ESG gatekeepers at S&P Global said that “Tesla lacked a low carbon strategy” and “their codes of business conduct” ranked poorly due to “racism and poor working conditions reported at their California plant”.  On this basis, they kicked Tesla out of the ESG index even while leaving fossil fuel company Exxon Mobil in its top 10.

Is this news?  Yes, to many investors who are ESG focused and track those indexes.  Is it to our team at Oak Harvest?  No.  Admittingly our investment team missed the big move up in Tesla over the last 3 years as we were constantly worried about its valuation and the company’s main source of profits being selling carbon offsets to other automakers.  No, we were not concerned or worried about its ESG ranking. However, if I was concerned about TeSLA’s ESG rank it wouldn’t be over these things that S&P Global found fault with. No,  it would be over its sourcing and market position in China.  I have yet to have anyone explain to me rationally how “ESG” rankings adjust for totalitarian or dictator led governments?  Or use of child labor? Or gender and religious discrimination in foreign markets?  Those social issues don’t seem to be highly ranked in these very arbitrary scoring systems.

This news last week and the recent move by S&P Global only serves to reinforce our desire to remain ESG rank agnostic in our investing.  Why? Because the ranking criteria seem to us to try to make scientific and precise far too many nebulous and unquantifiable factors that over time automatically and efficiently flow through to a company’s marginal return on invested capital.

Look no further than the recent leadership in the stock markets by the old-line fossil fuel companies, those that explore and drill for it, those that refine oil, and the companies that transport it, pipelines.  Did ESG ranking help them?  Yes, kind of in a perverse way.  The vilification by the ESG community of the fossil fuel energy industry scared off investment and re-investment in the industry and set the stage for a multiyear improvement in these companies and their investors cash returns. The last two years the best performing sectors In the markets have been those farthest removed and ranking lowest on those ESG Excel spreadsheets.

Is this investment news?  For those with an ESG mandate yes.  Is it investment news for portfolios constructed here at oak harvest for clients?  No, it should not be.

News or Noise:  Noise

https://www.cnbc.com/2022/05/18/why-tesla-was-kicked-out-of-the-sp-500s-esg-index.html