What Is ESG and What Companies Are in the S&P 500 ESG Index?

Mohit Oberoi, CFA - Author
By

May 19 2022, Published 9:41 a.m. ET

Tesla CEO Elon Musk is in the news for multiple reasons. The reasons include the flip flop over his Twitter acquisition, his claims that a fifth of Twitter accounts are fake, and his intent to vote Republican in 2024. Musk is also in the news after Tesla was booted out of the S&P 500 ESG Index.

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As one would have expected, Musk as well as his fans including ARK Invest’s Cathie Wood, have lashed out at Tesla’s exclusion from the index. It has also ignited debate on ESG investing and many are wondering if not Tesla, which companies make it to the coveted S&P 500 ESG Index.

What is ESG?

ESG (environmental, social, and governance) investing has been gaining traction across the world. ESG isn't synonymous with investing in clean energy companies like Tesla. The other two constituents of ESG, which are social and corporate governance, are also equally important.

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The social part of the equation measures how the company manages its relationship with different stakeholders like employees, customers, suppliers, local communities, and society in general. The “G” in ESG has to do with corporate governance. It’s a function of how the company deals with minority stockholder rights, executive pay, and internal controls.

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What is the S&P 500 ESG Index?

According to S&P Global, “The S&P 500 ESG Index is a broad-based, market-cap-weighted index that is designed to measure the performance of securities meeting sustainability criteria, while maintaining similar overall industry group weights as the S&P 500.” The current rebalancing is the fourth annual rebalancing for the index.

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What companies are in the S&P 500 ESG Index?

The S&P 500 ESG Index has 308 constituents in total. Apple and Microsoft are its top two constituents with a weightage of 9.65 percent and 8.4 percent, respectively. Amazon, Alphabet Inc A, and Alphabet Inc B shares account for 4.30 percent, 2.76 percent, and 2.56 percent, respectively.

Nvidia, UnitedHealth, Proctor & Gamble, ExxonMobil, and JPMorgan Chase are the other five companies in the top 10 in the same order.

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These companies aren't in the S&P 500 ESG Index.

Tesla, which has a 2.08 percent weightage in the S&P 500 Index after it was included in 2020, is the biggest exclusion from the Index. Berkshire Hathaway, Johnson & Johnson, Meta Platforms, and Home Depot are the other major S&P 500 companies that didn't make it to the S&P 500 ESG Index.

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Why wasn't Tesla included in the S&P 500 ESG Index?

S&P Global realized that Tesla’s exclusion from the Index would create controversy. After all, the company has been at the forefront of the global fight against climate change. It sold almost 1 million electric cars in 2021, which is way ahead of any other automotive company. Apart from electric cars, Tesla also sells solar and energy storage products.

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In a blog post, Margaret Dorn, the senior director and head of ESG Indices North America pointed to the multiple reasons why Tesla wasn’t included in the S&P 500 ESG Index. It said that the automotive industry subset, of which Tesla is a part, saw an increase in its average S&P DJI ESG Score whereas Tesla's score was “fairly stable” compared to the previous year.

She also listed several other factors for Tesla’s exclusion, including:

  • The lack of a low-carbon strategy at Tesla
  • Reports of racial discrimination and poor working conditions at the Fremont plant
  • Tesla’s handling of NHTSA investigations over multiple fatal autopilot accidents
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The blog post added, “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.” Musk has lashed out at the exclusion, especially since fossil fuel giant ExxonMobil made it to the Index.

Musk, who previously proclaimed to be a “socialist," has been warming up to conservatives. He offered to reinstate former President Donald Trump's Twitter account. Musk has said that he will vote a Republican in 2024, and even tweeted a meme that ESG is a “leftist agenda.”

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