Elon, Tesla & the 'S' in ESG

Elon Musk labelled Tesla’s ejection from the S&P 500 ESG Index as “a clear case of wacktivism”, but he may be missing the growing importance of the ‘social’ factor in Environmental, Social and Governance (ESG) investing. The electric car maker’s exit from the widely-followed index came after the California Department of Fair Employment and Housing filed a lawsuit over racial harassment and discrimination at its manufacturing plant in Fremont [1].

S&P also mentioned safety concerns with crashes linked to Tesla’s autopilot vehicles.

Hortense Bioy, director, sustainability research at Morningstar says: “Investors should be aware that E and S don’t always align. This is what Tesla partly demonstrates. You can offer some of the best and most innovative environmentally friendly products but the way you operate your business, including the way you treat your employees or, as well as the safety of your products may be short of the mark.”

Tesla isn’t the only company to fall foul of the ‘s’ factor. Clothing group Boohoo, a previous ESG favourite, got into trouble over pay and conditions at some of its suppliers in Leicester [2]. In 2020, the UK government ‘named and shamed’ 139 firms, including Tesco, Costco and Superdrug for failing to pay workers the minimum wage [3], while groups such as Ocado have faced shareholder rebellions over management pay. The condemnation of P&O Ferries’ sacking of 800 employees shows a growing focus on workers’ rights.

Social issues have been gaining prominence for investors more recently. These include companies’ treatment of staff, diversity, health and safety record, and supply chain standards. Bioy says the pandemic highlighted and accelerated inequalities. Many companies have had to prioritise the safety of their workers and customers and have been forced into tough decisions. Bjoy believes where they have made those decisions badly, it has often had a meaningful impact on their profitability.

There is a growing weight of evidence from academic studies highlighting the strong relationship between social performance and long-term financial performance. A recent study from Federated Hermes showed a tangible link between companies with a better record on social factors and share price performance [4].

European regulators are also starting to pay more attention to social issues. The European Union is developing a ‘social taxonomy’, with the UK likely to follow suit. The UK also has mandatory gender pay gap reporting. These initiatives may help define social goals and help companies develop metrics to report on them. They should also address a perennial gripe with the social factor – that it is hard to measure. While carbon emissions are relatively easy to track, the same cannot be said for the way a company treats its staff.

Many groups have started to call for a social transition – a fundamental change to the way companies look at profit.

All this should be a win-win for investors - as well as building for a fairer society, it’s also becoming increasingly clear that socially orientated companies can make for good investments.

On the one hand, such companies avoid scandals and the subsequent selloffs that come with shoddy practices. On the other, they tend to be building for a long-term, sustainable future. They’re keeping up with market trends and demands, and typically can point to strong management guiding their decision-making. In other words, they’re the sort of companies that most of us look to invest in.

Moreover, funds that take their companies’ social responsibilities seriously are also likely to demonstrate the same sort of risk analysis and screening processes that we’d expect from any competent management team.

‘S’ is becoming an increasingly important factor in investors’ decision-making. Not only is that good for society - it’s good too for returns.


CBS News, February 2022
Guardian, September 2020
Business Live, December 2020 
Institutional Asset Manager, January 2021