For those of you unfamiliar with the term "ESG," it stands for "Environmental, Social, Governance," and is intended to identify those companies whose priorities align with the Democratic Party which I feel I should point out is a 100% total coincidence.
More specifically, companies are awarded the ESG seal of approval as long as they pay homage to environmental concerns, align their ideals with social justice warriors, and adopt the kinds of corporate governance initiatives that ensure they stop obsessing over such inconsequential goals as "profits" and "shareholder return" and start focusing instead on far more important imperatives such as "gender diversity," "equity," and "income inequality."
This has become increasingly important in recent years as a groundswell of support for funds that invest only in ESG companies has erupted across the country by which I mean among people who make money selling funds that invest in ESG companies.
First, the common refrain that "investors are demanding ESG disclosures" fails to address who those investors are. Investors, of course, are not a monolith, but the conclusions drawn from empirical research in the space often treat them as such. That research tends to ignore individual investors and focuses on professional investors, including many who themselves offer ESG‐related products. That research also has largely been conducted by organizations, such as Blackrock, Ernst & Young, and Natixis, that themselves have an interest in the promotion of ESG.
Again, total coincidence.
Yes, individual investors do seem to care a lot less about ESG than the billionaires who run Blackrock.
While surveys generally show professional investor interest in ESG, few have asked about individual investors. Those that have found that individual investors show only some interest in ESG investing, which largely disappears during economic stress, and individual investors broadly view ESG disclosures as irrelevant when making investment decisions.
Which brings us to Tesla, once the darling of ESG investing given its pioneering efforts to bring electric cars to the world.
Part of Tesla's problem, which just as a reminder, makes electric cars, was, according to S&P:
...a decline in criteria level scores related to Tesla's (lack of) low carbon strategy.
You know which company scores highly in "low carbon strategy?" The largest oil company in the United States, that's who!
In any case, there were other ESG criteria that tripped up Tesla. As the S&P explains it:
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.
These allegations are not new. They are certainly serious, and should be taken seriously, but they have been swirling about for years now.
But something changed this year. I wonder what it could be...
Getting kicked out of the S&P 500 ESG index is a big deal, as the many ETFs (Exchange Traded Funds intended to mirror the performance of a given index and in which many investors participate) now have to drop Tesla by selling the shares they did hold. Many other ESG-focused funds will follow suit, not wanting to invest in a company that has lost the influential S&P's imprimatur with others likely to be pressured to do the same such as university endowments and pension funds.
Elon Musk, needless to say, was unhappy with this outcome.
In fact, he's kind of going on the warpath regarding the lawsuits Tesla was dinged for by the S&P.
No, seriously. War. Path.
Of course, he's still going to be Elon.
This is a battle among titans, powerful people in the Biden administration together with other billionaires fighting the richest man in the world while the rest of us try not to get squashed in the ensuing battle.
Still, it's good to have one guy who appears to be on our side.
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