How Does Tesla Get A Worse ESG Score Than 2 Oil Companies?

Isn’t it odd that Tesla has a bad Environmental, Social, and Governance (ESG) score yet oil companies have good ones? When you look at what Tesla is doing for the environment and compare those actions with how oil companies are profiting off of poisoning our environment, it just doesn’t make sense.

Tesla CEO Elon Musk replied to an article by Tesmanian that focused on Tesla urging large funds to stop misleading investors and correct Tesla’s ESG score. Tesla raised the issue of its low ESG score in its 2021 Impact Report, where it stated that the current ESG reports don’t analyze the magnitude of the positive impact on the world. Instead, they focus on measuring the dollar value of risk/return. You can read the 2021 Impact Report for more details.

Not only did Elon Musk comment on this topic, but so did one of Tesla’s board members, Hiromichi Mizuno, who added that Tesla wasn’t denouncing ESG investment but wanted the rating scheme to be fair, and making it fair would include looking at more positive impacts companies have on the world — not just the negative ones.

I’m going to do a quick comparison of Tesla’s ESG score and the scores of four oil and gas companies that, according to Investopedia, protect the environment. I may be biased, but I don’t think any of the oil and gas companies actually protect the environment. They may fund initiatives and try to go carbon neutral, but fossil fuels themselves are what’s harming our climate. After this, I’ll share another article that sheds light on why Tesla has a low score.

Tesla Vs. Oil Companies ESG Score

Let’s look at Tesla’s ESG score and compare it with a few oil companies that Investopedia says protect the environment. Sustainalytics noted that Tesla’s ESG score is 28.5 with “medium risk.” (A lower score is better.) Tesla ranks 41 out of 82 automobiles and 8,192 out of 14,666 in the Global Universe. Tesla’s score is based on two things: Exposure and Management. Sustainalytics writes:

“Exposure refers to the extent to which a company is exposed to different material ESG issues. Our exposure score takes into consideration subindustry and company-specific factors such as its business model.

Tesla Inc‘s Exposure is Medium.

“Management refers to how well a company is managing its relevant ESG issues. Our management score assesses the robustness of a company’s ESG programs, practices, and policies.

Tesla Inc‘s Management of ESG Material Risk is Average.”

In 2021, Investopedia published an article on the top four oil companies that protect the environment and highlighted the four companies and how they are concerned with their public images. For comparison with Tesla, I’ve grabbed the ESG ratings of these oil companies. They are as follows:

  1. Royal Dutch Shell ESG Score: 35.1 with a high exposure risk and strong management rating.
  2. TotalEnergies SE ESG Score: 29.2 with a medium exposure risk and strong management.
  3. Repsol SA ESG Score: 26.7 with a medium risk and strong management.
  4. Equinor ASA ESG Score: 32.0 with a high risk and strong management.

Just out of curiosity, I also looked at ExxonMobil’s score. The Exxon plant near my home was reported to be the most polluting plant in the nation last year. Exxon’s score was 36.6 with “high risk and strong management.”

There were two oil companies with a better score than Tesla’s — OMV AG and Repsol, both under 28.5. Among automakers, Mercedes-Benz and BYD had better scores than Tesla.

A Possible Reason Behind Tesla’s Low ESG Score

According to an article published by the GRC World Forum in February 2022, the scoring of Tesla’s ESG is similar to that of figure skating and kind of pointed to Elon Musk himself as the possible reason for the low score. Although I took this as an opinion piece, I thought the scoring comparison was interesting.

In the comparison, the author pointed out that judges give awards for artist, presentation, execution, difficulty level, and so on. Certain maneuvers may have higher scores depending on how tired the skater is during the stage of the performance. But if they do something extremely difficult, there’s still a ceiling (max result) they get for that in the rating system. Tesla has done this within a category labeled “developing a product that helps beat climate change.”

It was following this that the author pointed to Elon Musk for the low score:

“But for transparency, labor relations, adherence to governance, for example, having a CEO who doesn’t send out random tweets, Tesla scores poorly.”

The author continued by adding that Tesla’s statement from its 2019 impact assessment “was not exactly a statement that endeared Tesla to those who create ESG scores.” What exactly did Tesla say to piss off the judges? This:

“Making a significant and lasting impact on environmental sustainability is difficult to achieve without securing financial sustainability for the long term.”

Tesla does have a better ESG rating than most of the oil companies as well as its fellow automakers, such as VW and Toyota. Compared with last year’s score, this reflects improvement. The author’s final thought touched upon figure skating, noting that if there’s poor execution, one can lose points.

“Musk has helped create an EV triumph, but he must remember he is mortal, and the good he has done does not give him carte blanche to do what he likes — because just like with skating, you can lose marks for poor execution. “

My Final 2.5 Cents

If the author of the above article is correct, then it seems that ESG scores could be influenced by opinions instead of data. I would hope this isn’t the case. And I agree with Elon Musk here. These scoring systems need to include the positive impacts that a company has along with the negative ones.

I think that with Tesla’s recently published 2021 Impact Report, we can see a lot more of the good Tesla is doing for the environment. Tesla’s mission is accelerating the transition to sustainability, after all, and its employees are working incredibly hard to achieve those goals. One thing I found impactful was Tesla’s visit to the DRC and Argentina to not only assess the environmental risk, but to help the communities.

If ESG scores were to include more of the positive impacts and negative impacts a company has on the environment, perhaps this would encourage oil companies and other companies with poor scores to aim to have a better impact on the environment.


 


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