The S&P 500 Index: how Tesla’s exclusion signifies the importance of taking a holistic view to ESG

19 October 2022 

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When you hear ESG you probably (like most people) immediately think of the environment. Many businesses implementing ESG strategies focus on how they can ‘go greener’ with more sustainable and environmentally-friendly operations. But ESG encompasses so much more than that as outlined by what’s recently happened to Tesla being taken off the S&P 500 ESG index.

What is the S&P 500 ESG Index?

The Index, which launched in 2019, uses environmental, social and governance data to recommend organisations to investors. It ranks companies in similar industries against each other and its criteria takes a broad view of ESG, taking into account everything from how a company’s carbon footprint impacts the planet through to stakeholder, employee and customer relations. Effectively, the Index is there to help investors make more sustainable, strategic long-term financial decisions.

Considering people and the planet

As part of its annual review, the S&P 500 ESG index recently removed Tesla from its list, while keeping other large organisations on it including Exxon Mobil. At first glance the decision may seem odd.

When you think of Tesla your likely first thoughts will be of a company at the forefront of green innovation, changing the landscape with electric vehicles and forging a path as an industry leader towards a more sustainable future. How then has a company so renowned for its green credentials been kicked off the Index?

Tesla’s owner, Elon Musk, tweeted: “ESG is a scam. It has been weaponised by phony social justice warriors” as his explanation for Tesla being excluded and Exxon being included.

And in Tesla’s 2021 impact report they state: “The most striking feature of the [ESG rating] system is how rarely a company’s record on climate change seems to get in the way of its climb up the ESG ladder—or even to factor at all. If a company continues to decrease its emissions its ESG ratings are likely to go up.”

While the general shock around Tesla’s exclusion (and the inclusion of one of the world’s worst emissions creators) is understandable, the S&P 500 methodology may shed some light.

As previously mentioned, the Index takes a broader view of ESG, looking at the wider landscape of a company’s overall operational impact – not just environmental. Tesla rates well across many of the environmental elements of ESG but (according to the Index) it doesn’t fare so well on the social and governance elements with S&P citing allegations of racism, poor working conditions and reported fatalities caused by Tesla’s automated car driving systems as reasons for the companies removal from the Index.

Margaret Dorn, Head of Environmental, Social, and Governance (ESG) Indices for North America summed this up by saying: “While Tesla may be playing its part in eliminating fuel-powered cars, it has fallen behind its peers when examined through a broader ESG lens.”

A holistic view of ESG

While the exclusion of Tesla from the Index has raised some questions, so has the inclusion of organisations like Exxon Mobil, specifically around the wider reporting of ESG including Scope 3 emissions. ESG criteria focuses on direct emissions over emissions from elsewhere in the supply chain. In theory this means if a company reduces their Scope 1 & 2 emissions (while ignoring Scope 3) they could be seen as a viable investment. But considering Scope 3 can account for some of the biggest emissions, this could seem like a potentially unfair bias.

What can businesses and investors learn?

There’s a lot to learn from Tesla being taken off the S&P 500 ESG Index. Firstly, it highlights the importance of businesses and investors taking a more holistic view to ESG – not just focusing on environmental practices but also social and governance.

The recent news also outlines the importance of aligning to organisational North Stars. As well as reviewing key data such as carbon footprint and environmental impact, corporates can and should report on wider criteria to ensure it aligns with their values and beliefs.

From promoting diversity in the workplace to contributing to communities, companies are now expected to tie their ESG reporting to their North Star to give clarity to the direction and purpose of the company for employees, investors and customers.

This is crucial to growth and demonstrates how ESG isn’t just about compliance. In-depth ESG reporting can also add value to a business because investors are increasingly concerned with issues like diversity, climate change and sustainability.

How we can help

The ESG reporting you do is crucial to the long-term future of your business. However, if you’re reporting on the wrong areas, analysing your data incorrectly or missing some key elements of ESG from your reporting you could be wasting time and resources, and (in the worst case scenario) it could even harm your business and give your competitors an edge.

At Turnkey, we work with organisations to streamline ESG and focus on not just collecting data but analysing it too. Our dynamic software tools combined with our industry-leading experience means we can simplify ESG reporting and make it meaningful, so you can maximise company efficiency, reduce costs, increase productivity and minimise risk.

We can work with you no matter where you are in your ESG journey. If you’re just getting started, our expert team can help you build out an ESG roadmap, paying attention to the areas and topics that are key to your business. And if you’re moving from compliance to more complex ESG frameworks, we can guide you further along and can even help you with certification.

Managing ESG across the entire supply chain

Simple and quick to deploy, our software tools allow you to automatically collect and aggregate data from a variety of sources across your business and supply chain. Mapping this data against your ESG requirements means you’ll have complete visibility on how it aligns with your wider business strategies. You can also use our tools to identify savings opportunities, improve productivity across the organisation and highlight best practices, increasing the overall value of your business to investors.

Managing risk and creating opportunities

Modern supply chains can sometimes be complex and this can create risk. To drive sustainability (amongst other things) this risk needs to be managed and we can help you do just that. Designed specifically for risk management, our industry-leading platform allows you to digitise, track and report on risk with ease, providing visual insights in real-time that can help you reduce costs and grow the value of your company.

We know understanding how to use ESG reporting to your advantage can be difficult; our expert team is here to help. Contact us today to arrange a product demo.

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