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

In May, electric car maker Tesla was removed from the ESG S&P 500 index. In response, CEO Elon Musk tweeted that ESG was a “scam” that “was weaponized by bogus social justice campaigners.”

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Tesla According to the CEO of Clarity AI, a technology firm specializing in providing sustainability assessment software, chief executive Elon Musk may have misunderstood the meaning of ESG (environmental, social and governance performance).

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

“Many investors believe that this can only be focused on climate impact,” she said. “Not just ‘many investors’ – even Elon Musk tweeted about it.”

In May, electric vehicle maker Tesla was excluded from the ESG S&P 500 index. In response, Musk tweeted that the ESG was a “scam” that “was weaponized by bogus social justice campaigners.”

The same tweet also notes that ExxonMobil The S&P 500 ranked in the top 10 in the world for Environment, Social Security and Governance (ESG), while Tesla did not make the list!” The oil and gas supermajor is listed as one of “Top 10 Components by Index Weight”.

Like its CEO, Tesla has also spoken out about the increasingly heated ESG debate. In his 2021 Impact Report it stated: “Existing ESG assessment methodologies are fundamentally flawed. To bring about much-needed change, ESG needs to evolve to measure impact in the real world.”

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

“Individual investors who entrust their money to the ESG funds of large investment organizations may not be aware that their money can be used to buy shares in companies that worsen rather than improve climate change.”

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Beyond the climate

During her interview with CNBC, Clarity AI’s Minguela stated that Musk’s reaction points to a broader issue around what people think ESG really means.

“Elon Musk might have thought ESG was measuring climate impact,” she said. “And that’s why he was concerned that Tesla dropped out of the ESG Sustainability Index and Exxon got into that index.”

“But that’s a good sign [of] … How Elon Musk does not understand what ESG is … But he is an incredibly smart person, right? So my guess is that if that happens to him, it will happen to many other investors as well.”

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

Tesla did not respond to a request from CNBC for comment on Minguela’s remarks prior to publication.

Definitions of what ESG actually means are broad and varied. Despite the fact that much attention is paid to the “environmental” aspect, both social and managerial aspects are important.

The state bank British Business Bank, for example, describes ESG as “a collective term for the impact of a business on the environment and society, as well as how reliable and transparent its management is in terms of company management, executive compensation, audit, internal control and shareholders’ rights”.

Greenwashing

Discussions around ESG and sustainability have gained public attention in light of growing concerns about social issues and the environment.

Corporations around the world are trying polish their sustainability credentials announcing zero targets and plans to reduce the impact of its activities on the environment.

In some quarters, however, there is considerable skepticism about many of the company’s sustainability claims, given that specific details are often hard to come by and timelines for achieving these goals are sometimes decades away.

This often leads to accusations of greenwashing, a term that the environmental campaign group Greenpeace UK has called a “PR tactic” used “to make a company or product look green without significantly reducing its environmental impact”.