Tesla urges large funds to stop misleading investors and change their ESG valuation of companies. This will prevent a situation where investors who seek to invest only in environmentally friendly companies will actually invest in companies that pollute the environment.
Tesla published the 2021 Impact Report, which raised the issue of ESG (Environmental, Social, and Governance). The manufacturer explained that the current ESG reports do not measure the magnitude of the positive impact on the world, which is the biggest mistake. Instead, it focuses on measuring the dollar value of risk/return. The problem is that individual investors who trust their money to ESG funds of large investment institutions may not be aware that they can be used to buy shares in companies that worsen rather than improve climate change.
As an example, Tesla cites measuring the impact of the automotive industry. While the average investor might think that the more electric vehicles an automaker sells, as a percentage of total volumes, the better its ESG score—but the reality is different. As long as the company continues to slightly reduce emissions from its manufacturing operations while also releasing internal combustion engine vehicles, its ESG ratings are likely to rise. But, vehicle use-phase emissions, which represent 80-90% of total automotive emissions (included in Scope 3 of ESG reporting), tend to be misreported due to the use of unrealistic assumptions or not reported at all. Thus, it turns out that some oil and gas companies rank higher than Tesla on “Environmental Impact,” which, as we understand, is completely untrue. Tesla cited Bloomberg Businessweek about the “ESG Mirage” to back up its conclusion:
“The most striking feature of the [ESG rating] system is how rarely a company’s record on climate change seems to get in the way of its climb up the ESG ladder—or even to factor at all.”
Based on the facts, Tesla suggested what it thought would help remedy this situation. The manufacturer is sure that it is necessary to create a system that “measures and scrutinizes the actual positive impact on our planet, so unsuspecting individual investors can choose to support companies that can make and prioritize positive change.”
On the product front, companies should be required to use real-world figures wherever remotely feasible, and to clearly state when estimates are provided, but not actual numbers, proposed Tesla. For example, emissions from vehicles during use, which account for the vast majority of life cycle emissions, are reported according to estimates by car manufacturers, but in fact, almost never reflect the real data. Automakers themselves often have access to this data, but mislead by specifically not disclosing it.
While many ESG ratings evaluate: “Does this ESG issue impact the profitability of the company?” Tesla points out that we need a system that evaluates: “Does the growth of this company have a positive impact on the world?” This evolution of ESG must be supported by institutional investors, rating agencies, public companies, and the general public, so that then the world will seek significant positive impact, and companies will start talking about their real impact.
© 2022, Eva Fox | Tesmanian. All rights reserved.
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