As popular as ESG is, not everyone’s a fan. Tesla CEO Elon Musk recently criticized ESG as a “scam” after his company, a prominent leader in the transition of vehicles toward renewable energy, was dropped from the S&P 500 ESG Index, the benchmark for the Invesco S&P 500 ESG ETF (Ticker: ESG). But while Musk might feel as if his company was singled out unfairly, Berry says nothing could be further from the truth.
“They key thing to know here is that this is a passive index that follows a transparent, rules-based approach,” he says. “The index provider, S&P global, has one of the most comprehensive and robust ESG data analysis groups in the world, scoring constituents objectively based on over 1,000 data points on each company.”
According to Berry, the S&P 500 ESG index takes companies from within the S&P 500, and excludes the ones that fall into the bottom 25% in terms of ESG performance from each sector. While Tesla has managed to keep its ESG score fairly stable over the past 12 months, its peers in the automobile and components sector have improved theirs in response to calls to do better from an ESG perspective, which effectively resulted in Tesla becoming one of the laggards in its industry.
“S&P have posted on their website a full breakdown of some of their concerns around Tesla,” Berry said. “Ultimately the reason for the poor ESG score was that there was a lack of a clear carbon strategy at Tesla, as well as some questionable labour practices. Those two issues really were what hurt Tesla’s ESG ranking relative to its peer group.”
And while Musk’s reaction might make it sound as if Tesla has been banished from the universe of ESG, that’s far from the case. To illustrate the point, Berry referred to the Invesco S&P 500 ESG Tilt Index ETF (Ticker: ISTE). Like the Invesco S&P 500 ESG Index ETF, it also has the S&P 500 as its parent index, and aims to provide a similar risk-return profile while improving on the overall ESG score.