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Environmental, social, and governance expectations have come a long way in the last several years as vague calls for better ESG engagement have crystalized into more material standards ranked by institutions like S&P Global and Morningstar. As data collection and related technology advance, companies are being pushed toward more comprehensive ESG disclosures–and many of the bigger players don’t like it.
One of the drivers behind the growing backlash against ESG reporting is that it highlights the shortcomings of many ESG efforts by spotlighting them in a broader context within the company’s own operations and comparing them against similar-sized companies. We’ll now take a look at Tesla, helmed by one of the world’s most vocal and polarizing ESG opponents, to demonstrate the critical nature of context in ESG and how it can affect investor and consumer sentiments.
Much ado about unfair ratings
Upon the release of 2023’s S&P Global and London Stock Exchange ESG ratings, Elon Musk has once again unequivocally stated his feelings on the issue. About one year after calling ESG “a scam” on Twitter, he declared that “ESG is the devil”. The tweet comes under similar circumstances as the previous year, after the S&P rankings give Tesla a poor score of 37 while scoring tobacco maker Philip Morris at a substantial 84. Similarly, the London Stock Exchange rated British American Tobacco at 94 on ESG, while Tesla lagged at 65.
These ratings do initially come as a surprise, with many asking how companies that churn out products that kill 8 million people per year are getting better scores than the maker of electric vehicles that may have positive long-term effects on our climate. However, ESG ratings are not about the products themselves, but about the company’s operations and leadership. That’s where Tesla is failing and refusing to make the changes ESG investors and consumers desire.
A noble mission, yet notable pitfalls
Electric vehicles undeniably represent an opportunity to vastly reduce emissions. Among multiple, sometimes conflicting studies, the consensus is that electric vehicles do eliminate a significant portion of CO2 emissions–even when the batteries they use are more intensive to make and the electricity they run on is generated by coal. As grid decarbonization accelerates worldwide, the positive impact of EVs will only continue to grow. With this information in mind, it’s clear that EVs are a product that supports environmental goals. However, when you pull back the curtain on the supply chain, the waters grow murky at best.
For Tesla, the top-of-mind problem is child and forced labor. The issue was already pronounced in 2022 when Tesla’s annual report acknowledged a shareholder request to publicly describe if and how the company’s policies on material sourcing would allow them to eradicate all child labor in the battery supply chain by 2025. The lackluster response acknowledged that the artisanal mines in the Democratic Republic of Congo supplying 70 percent of all cobalt are notorious for child labor infractions. The report also washed its hands of the issue by arguing supplier conduct is not something the company can control.
After making little to no progress throughout 2022, 17 institutional investors holding over $1.5 billion in Tesla stock sent a letter to Tesla Chair Robyn Denholm. The letter excoriates Tesla’s lack of action on human rights and labor rights as representing significant risks in the legal, operational, and reputational arenas–putting its long-term value in serious jeopardy. The letter refers to elements of the Xinjiang Uygur Autonomous Region supply chain as “substantially tainted with forced labor.”
Governance moving into the spotlight
Tesla shareholders are making it clear that governance is a key inflection point for faltering loyalty to the brand. The letter indicates that the initial vision of Tesla as a true leader in the transition to a green economy is souring and that the group is becoming increasingly concerned over the lack of governance. Shareholders are demanding the company does more to address labor issues, such as scrapping supplier “expectations” for standardized policies that carry actual consequences for infractions. There is even a white paper from the NYU Stern Center for Business and Human Rights that provides guidance in the formalization of artisanal mining–a process that would help enforce basic rights and mitigate risks from extraction processes.
The question now is what, if anything, Tesla will do to create the zero-tolerance labor rights policies needed to position itself as the socially responsible organization it needs to be to climb up ESG rankings.
Looking deeper means progressing further
Tesla’s low ESG rankings–and the leadership response to those rankings–show there’s always going to be more to ESG than meets the eye. If you want to leverage it as a long-term value creator, you need to understand your company’s supply chain and third-party network in relation to your end product and your competitors’ operations. While Elon Musk points to companies with harmful products that consumers self-select, he is actively ignoring the impacts of his leadership choices on the workers who are frequently being forced into harm’s way for the sake of his own product. The product itself may be a net positive, but the way it comes to fruition still matters greatly.
This lack of contextual awareness, intentional or not, highlights just how important it is to have tools that will broaden and deepen transparency throughout the supply chain. With complete transparency and iron-clad policies in place, leaders will be able to better weigh every element in the third-party ecosystem and prune the partners that are falling short of international regulations as well as any unique company standards. Ultimately, transparency is the key to unlocking better compliance and reporting to maintain investor and consumer trust in the ESG arena.
