Earlier this month Forbes reported that Tesla (TSLA) was removed from the S&P ESG Index, citing "flaws in its business conduct and, ironically, aspects of the company’s low-carbon strategy". Yet companies like Amazon, United Health, and even Exxon Mobil make the cut. This inflamed Elon Musk who proclaimed, "ESG is a scam", but the truth may lie somewhere between two extremes.
When we discuss Environmental, Social, and Governance investing there is a distinct difference between how a company should be socially responsible from one investor to another, as well as the criteria for a high verses low ESG rating. Looking more closely at Tesla, for example, according to the ESG snapshot generated through Ethos® we see that it scores very high on renewable energy (not surprising), but extremely low on decent, safe work. For someone who is passionate about investing in companies focused on renewables Tesla might make sense, but for someone who is adamant that their investments support safe working environments, this may not be the best fit. In comparison, we could deep dive into the ESG ratings for Exxon Mobil (XOM) or even look more closely at the SPDR S&P 500 ESG ETF (EFIV) which tracks the index.
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There is a less obvious difference between slapping an "ESG friendly" label on a company or fund and looking under the hood at why it was rated a certain way. Sometimes this may have more to do with optics and marketing, than it does with social responsibility, which can give ESG investors a bad rep and devalue the approach. True ESG investing strikes a careful balance between diversification among asset classes and sectors, while taking into account risk tolerance, investment goals, and the causes that mean the most to the individual.