Update: Tesla’s Standing In The S&P 500 ESG Index

As discussed in my previous blog, Tesla would not be an immediate addition to the S&P 500® ESG Index following its addition to the S&P 500 on Dec. 21, 2020. Instead, the ever-popular automaker would have to wait until the next annual rebalance of the index. This rebalance finally took place, and as of May 1, 2021, Tesla officially became a constituent of the S&P 500 ESG Index. Tesla’s inclusion begs two questions: how did we get here, and what does it mean?

Tesla’s entry into the S&P 500 ESG Index could be due to the index methodology as much as Tesla’s own improvement from a sustainability perspective. Tesla’s S&P DJI ESG Score was 22 out of 100 (up 8 points from last year’s score), driven by its ESG Dimension Scores, including an Environmental score of 28 (up 1 point), a Social score of 6 (up 2 points), and a Governance score of 49 (up 21 points). Though there are numerous factors at play with regards to Tesla’s final score, such as the ESG performance of its industry competitors globally, with this rebalance, Tesla’s standing among its industry group peers in the S&P 500 improved from the last rebalance (if it had been in the S&P 500 last year).

The automaker is not reviewed in a vacuum, however. Where it stands relative to its peers matters. The selection process for the S&P 500 ESG Index is performed on a GICS® industry group basis. As of the rebalancing reference date, Tesla was ranked fifth out of five companies in the Automobiles & Components industry group of the S&P 500.

Why would the worst-ranked company in a particular industry group be selected as a constituent? The S&P DJI ESG Score is only one component of the selection process. There is also a market capitalization element applied, which is designed to keep the GICS industry group weights of the S&P 500 ESG Index similar to the S&P 500.1

As shown in Exhibit 1, selecting the top four companies in the industry group results in only 25% of the industry group FMC being selected. By selecting Tesla, 100% of the industry group’s FMC is selected, which is closer to the target 75% FMC than if the company were not selected (a critical component of the selection methodology). This means that Tesla’s size, more than its sustainability performance, was the main driver in its inclusion.

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