Elon Musk’s Comments Underscore the Complexity of ESG
May 19, 2022. On May 18, 2022, Tesla CEO Elon Musk created angst within the ESG community with his post on Twitter, stating:
“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.”
Understandably, the comment from Musk, a very well-known public figure, broadly painting ESG as a fraud has created a lot of attention. Some of this attention has been warranted, highlighting the need for the continued evolution of ESG as a business practice and improvements in its standardization and regulation. It has also encouraged unwarranted attention by casting ESG as a politically motivated pejorative and dismissing ESG initiatives as being a waste of a company’s time and investment.
It can be easy for business leaders who are not familiar with ESG to be swayed by Musk’s comments to diminish ESG as a “woke” or frivolous activity. In case executives in your organization use Musk’s comments as an excuse to dismiss, or worse yet, defund, ESG or CSR initiatives in your organization, providing further context is helpful for their understanding:
ESG is not just an environmental activity. Many executives, like Musk, often emphasize the Environmental, and forget about the Social and Governance elements of ESG. In the case of Tesla’s S&P 500 ESG Index ranking, the company’s recent handling of alleged human rights issues regarding reported incidences of racism and sexual harassment in its factories may have contributed to the decreased ranking in the S&P ESG Index. In addition, the way in which the company has dealt with a government probe into deaths and injuries related to its driver-assistance system in its vehicles may have also impacted the ranking.
ESG index rankings may ignore core business efforts. Many ESG ranking methodologies are designed to look at the environmental and social impacts of a company’s process to make a product, rather than the overall impact that a company’s core product may have on society. It can be seen as a classic case of “mission versus management”. For example, consider a solar panel manufacturer with a mission to increase adoption of environmentally friendly solar solutions. However, the manufacturer has no management process to safely dispose of hazardous chemicals involved in the manufacturing process, and transportation of the panels require fuel intensive diesel trucks. If an ESG index methodology only looks at the manufacturing process of the core business of making solar panels, it would score low. If the index looks at the benefits of increased adoption of solar panels on the environment, the score would be high. One can infer from Musk’s post that because Tesla makes EV’s that don't use gas, it should rank highly on the S&P ESG Index. In the case of the S&P ESG index, it likely does not measure auto emissions avoided by using EVs, but rather focuses on the auto manufacturing process itself.
ESG ranking methodologies are not created equally. While Musk’s Twitter post references the S&P ESG Index, it is important to know that there are many indexes with differing methodologies and areas of focus. It measures the stock performance of a peer group of companies that meet certain sustainability criteria, like working towards a net zero carbon goal for the company, for example. Another index, the FTSE ESG Index, focuses more on emissions generated by a company, like factory emissions, for example, and not necessarily the emissions from the products that were manufactured. And the MSCI Index, another common environmental ranking, would look at companies with products and services that are environmentally beneficial, but not necessarily at the manufacturing process of those products themselves. It is easy to see how confusion can occur when ESG ranking methodologies differ so widely.
No doubt, ESG is in desperate need of regulatory standardization. But calling ESG a scam negates the hard work and progress that governments, companies, and ESG executives from around the world have made, and the movement of ESG in a positive direction. This sort of offhand comment from an influential company figurehead also helps others justify incorrect assumptions, while erecting new, unnecessary barriers to finding solutions at a time when we need ESG the most.
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