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The latest ESG version of the S&P 500 index has a notable absentee, who took the exclusion with his customary grace.

At face value, it would seem mad to not have Tesla — the world’s dominant maker of electric cars — in the environmental, social and governance-focused version of the world’s most influential equity index. It is for many the first ESG-friendly stock they’d be able to name.

And FTAV has long been sceptical of the ESG mania, which often looks more like a new way to flog old underperforming products at a higher price point with little-to-zero discernible actual impact on the world’s pressing issues (unless you consider contracting asset management margins to be humanity’s greatest calamity).

But the black hole-sized persecution complex of Musk grates so much that we went looking for a better understanding of how Tesla got dumped by S&P’s ESG indexing people. As we suspected, the answer lies in the fact that ESG is obviously about more than just the E, and the knotty unglamorous reality of how indices are created.

Likely anticipating Musk’s meltdown, Margaret Dorn, head of North American ESG rates indices at S&P Dow Jones Indices, has published a helpful guide to the S&P 500 ESG reshuffle with its biggest section on Tesla.

Here is the nub, with our emphasis below.

. . . The GICS industry group in which Tesla is assessed (Automobiles & Components) experienced an overall increase in its average S&P DJI ESG Score. So, while Tesla’s S&P DJI ESG Score has remained fairly stable year-over-year, it was pushed further down the ranks relative to its global industry group peers.

A few of the factors contributing to its 2021 S&P DJI ESG Score were a decline in criteria level scores related to Tesla’s (lack of) low carbon strategy and codes of business conduct.

In addition, a Media and Stakeholder Analysis, a process that seeks to identify a company’s current and potential future exposure to risks stemming from its involvement in a controversial incident, identified two separate events centered around claims of racial discrimination and poor working conditions at Tesla’s Fremont factory, as well as its handling of the NHTSA investigation after multiple deaths and injuries were linked to its autopilot vehicles. Both of these events had a negative impact on the company’s S&P DJI ESG Score at the criteria level, and subsequently its overall score.

While Tesla may be playing its part in taking fuel-powered cars off the road, it has fallen behind its peers when examined through a wider ESG lens.

In other words, this particular ESG index tries to mimic the mother benchmark in terms of industries, weightings and performance, and just tilt towards those that are relative ESG winners within each sector (as determined by the Global Industry Classification Standard, or GICS).

Some companies might score well on environmental issues but badly on the G and S by, for example, being led by a tweet-happy technoking with a supine board. Which is why you get seemingly weird things like ExxonMobil as a top-10 constituent in an ESG index, while Tesla got ditched this time, along with Berkshire Hathaway, Meta and Johnson & Johnson.

Obviously, the importance of this to Tesla’s stock is approximately equal to how much Musk seems to worry about financial regulators: that is, indistinguishable from zero. Tesla is still in the flagship S&P 500 that actually matters, and for its legion of fans, negging will only solidify their fandom.

But if the brouhaha shows more people the sausage-making reality of ESG grades, ratings, indices etc — criteria are inherently subjective, the data are a mess and outcomes are all over the map — then maybe it will have been worth it.

It won’t help Musk’s persecution complex, however.

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