Sustainability Index Insults Musk By Dropping Tesla

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“You can’t have a cause for racial equality and be considered a top ESG name,” he added.

Passive index funds, which collectively drive around one-third of all assets invested in the stock market, need to match their portfolio to the index they track. Being included or excluded from an index can affect a company’s stock price. Shares of General Electric, for example, fell 3 percent shortly after it was announced that the company, an original member of the Dow Jones industrial average, was removed from the index in mid-2018.

But the more than 30 percent drop in Tesla’s share price since late March was mostly the result of concerns over Mr Musk’s bid to buy Twitter and a broader shift in investors’ outlook on tech stocks.

S&P reported that at the end of December 2020, there were $65 billion in assets invested in funds linked to the ESG index. That’s much smaller than the $13 trillion in funds tied to the more widely followed S&P 500 index, of which Tesla is a member. That $65 billion is also small compared to Tesla’s total market cap of around $750 billion. And only some of these ESG funds are in Tesla.

Moreover, of the $65 billion tied to the ESG index, only $11 billion of that money is invested in passive index funds that will be required to sell Tesla shares. The rest of the money is in funds that benchmark their performance against the S&P 500 ESG index. Many of these funds are actively managed by portfolio managers. These funds are not required to sell Tesla assets, but they can do so to not stray too far from the index against which investors are compared.

“Tesla is not an open and closed ESG case,” said Jon Hale, who leads sustainability research at mutual fund monitoring firm Morningstar. “While it is clear that the company’s product is beneficial to the environment, Tesla is now a large company and also has an impact on employees and customers, and these issues concern ESG investors.”

Many other leading companies were also removed from the index in April, when S&P determined that they no longer met the membership criteria. Chevron, Delta Air Lines, Home Depot, and News Corp.

Even if the removals don’t affect the value of a company’s stock, they can have an impact on the company’s actions. “Elon Musk and Tesla might be exceptions,” said Mr. Hale. “But the upside is that very few companies want to lag behind ESG in the current environment.”