Why there are questions marks about Tesla’s ESG performance
Posted 7 June 2023
From darling of the transition to Net Zero to being unceremoniously ejected from the S&P’s ESG index and now facing angry letters from major shareholders, the wheels have well and truly come off Tesla’s sustainability ambitions.
Following a series of catastrophes including fatal road crashes, accusations of racial discrimination and poor safety measures at car manufacturing plants, for the past year Tesla has not featured in S&P’s list of the top 500 sustainable companies. Meanwhile, data and analytics firm Sustainalytics rates Tesla as medium, citing issues with corporate governance and labour relations.
Such are the concerns about Tesla’s ESG credentials that last month a group of 17 investors holding a combined $1.5 billion of stock wrote to the board of directors claiming that it is “failing to adequately represent the interests of Tesla’s shareholders”.
The letter, whose signatories include NYC Comptroller’s Office and Swedish pension fund AP7, states: “The Board’s meagre oversight of CEO Elon Musk and other critical aspects of corporate strategy, including the company’s approach to human rights and labour rights, exposes the company to substantial legal, operational, and reputational risks, thereby jeopardising its long-term value.”
They also raise concern about Musk’s excessive distraction and overt focus on other ventures – notably his purchase of Twitter last year – leading to “an inability to address the multiple strategic and competitive issues facing Tesla”.
And they have a point. Tesla’s shares tanked after Musk took over the social media site losing a third of their value and the stock price remains well down on its 2021 highs, although admittedly the latest falls follow the publication of the shareholder letter.
There are also concerns about the remuneration at Tesla where directors, among them Musk’s brother Kimbal Musk and close personal friends Ira Ehrenpreis and James Murdoch, receive millions of dollars in stock options compared to the average director pay of $300,000 annually.
Investors are concerned that these “close personal ties and extraordinary pay reduces the Board’s objectivity, independence, and ability to prioritise the needs of Tesla and its shareholders”.
Despite these concerns, Tesla is a mainstay of passive funds that track the index of which the company is a constituent, albeit one with diminishing size. In fact, according to a February report in the Financial Times, the big index managers including Vanguard, BlackRock and State Street own more Tesla stock than Musk himself.
However, the FT notes that not all the stock owned by the big three is limited to their passive investments, which leads one to question the company’s enduring appeal even to those not beholden to an index.
The answer could well be future growth potential. Removal of petrol cars is critical to achieving climate change ambitions, and there is no denying Tesla’s role in the transition.
And ultimately, despite the recent share price volatility, the long-term investment appeal of Tesla’s is undeniable. The stock was worth $17 when it went floated in 2020 to reach all-time highs of $409.97 in November 2021, and it still boasts a yearly average of $214.44.
With such compelling performance, it may well be that only the most ardent of ESG investors can resist.