Elon Musk is a smart person, but he doesn’t understand ESG: Tech CEO

In May, electric car maker Tesla was removed from the S&P 500’s ESG index. In response, CEO Elon Musk tweeted that ESG was “a scam” “armed by fake social justice fighters.”

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Tesla Chief Elon Musk may have misunderstood the meaning behind environmental, social and governance (ESG), according to the CEO of Clarity AI, a technology company specializing in providing software to assess sustainability.

In an interview with CNBC’s last month “Squawk Box Europe’, Rebeca Minguela spoke about the confusion surrounding what ESG actually means.

“A lot of investors think it might just focus on climate impact,” she said. “Not just ‘a lot of investors’ – even Elon Musk tweeted about it.”

In May, electric car maker Tesla was removed from the S&P 500 ESG index. In response, Musk tweeted that ESG was “a scam” that was “armed by fake social justice fighters.”

The same tweet also noted that: ExxonMobil was rated in the top ten best in the world for environment, social affairs and governance (ESG) by S&P 500, while Tesla failed to make the list! The oil and gas supermajor is listed as one of the “Top 10 Constituents by Index Weight.”

Like its CEO, Tesla has also weighed in on the increasingly fraught debate over ESG. In its Impact Report for 2021, it said: “Current ESG assessment methodologies are fundamentally flawed. To achieve the urgently needed change, ESG must evolve to measure impact in the real world.”

“Current environmental, social and governance (ESG) reporting does not measure the magnitude of the positive impact on the world,” it added. “Instead, it focuses on measuring the dollar value of risk/return.”

“Individual investors — who entrust their money to ESG funds from large investment funds — may not know that their money can be used to buy stocks of companies that are making climate change worse, not better.”

Read more about electric vehicles from CNBC Pro

Beyond Climate

During her interview with CNBC, Clarity AI’s Minguela argued that Musk’s response pointed to a broader issue surrounding people’s views on what ESG actually stands for.

“Elon Musk may have thought that ESG measures climate impact,” she said. “And that’s why he was concerned that Tesla would drop the ESG sustainability index and that Exxon would be in that index.”

“But that’s a good sign [of] … how Elon Musk does not understand what ESG means … And he is an incredibly smart person, right? So I think if that happens to him, it will happen to a lot of other investors.”

“So that’s why it’s so important that they have tools and a better understanding of what ESG really means and what the different frameworks are trying to measure.”

Tesla had not responded to CNBC’s request for comment on Minguela’s comments prior to publication.

The definitions of what ESG actually means are wide and varied. Although much attention is paid to the ‘environmental’ aspect, both the social and administrative aspects are important.

For example, the government-owned British Business Bank describes ESG as a “collective term for a company’s impact on the environment and society, as well as how robust and transparent its governance is in terms of corporate leadership, executive compensation, auditing , internal controls and shareholder rights.”

green washing

Discussions about ESG and sustainability have attracted publicity in light of growing concerns about social issues and the environment.

Companies around the world are trying to polishing their sustainability credentials by announcing net-zero targets and plans to reduce the carbon footprint of their operations.

However, there is considerable skepticism in some circles about many of the sustainability-related claims companies are making, as concrete details are often difficult to find and the data for achieving these goals is sometimes decades away.

That often leads to accusations of greenwashing, a term the environmental campaign group Greenpeace UK calls a “PR tactic” used “to make a company or product appear eco-friendly without significantly reducing its impact on the environment” .

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