Corporate Scandal Analysis: Telsa

Since being founded in 2003, automobile manufacturer Tesla has grown into an international leader in the popularization of electric vehicles and other forms of renewable energy. As a result, the company is often considered the gold standard for other large-scale automotive companies joining the fight against harmful carbon emissions.

On the surface, one might think that Tesla would be the perfect example of an “ESG Darling”. However, in April 2022 this was proven not to be the case when Tesla was removed from the S&P500 ESG index after highlighting problems with its commitment to Social and Governance issues.

Tesla CEO Elon Musk has been extremely vocal regarding his opinions on ESG metrics, calling corporate ESG “the Devil Incarnate”, and believing that the entire ESG system is nothing more than “a scam”. While many would consider this a strange stance to take for the leader of a company that is so clearly committed to Environmental sustainability by way of technological advancements, Musk has stood by his comments, taking to Twitter to voice his continued displeasure.

Orenda’s Analysis

Tesla was removed from the S&P500 in April 2022 due to its low ESG rating in multiple categories. Specifically, Tesla was criticized for its lackluster codes of business conduct, along with reports of racism and poor working conditions at a manufacturing plant in California which led to a lawsuit in February of 2022. Additionally, the company’s poor handling of injuries and deaths directly linked to its driver-assistant systems was identified as one of the core issues that was considered in the company’s dismissal.

During this time, red flags began to fly in relation to Tesla’s ESG rating across the board. As its ESG reputation took hit after hit, Tesla was no longer at a reasonably comparable rating in relation to its industry peers.

According to Orenda’s ESG insights for this period, Tesla’s scores fell to the bottom 25% within its sector. In the graphics below, you will see the trends in Tesla’s Reputation Capital from January 1st – May 1st 2021, which is calculated using Orenda’s Social Positioning and ESG scores, as well as overall engagement numbers. This is then compared to the company’s 100-day average baseline.

Reputation Capital is accumulated over time based on the amount of ESG good a company has done historically. In other words, it is “money in the bank” – the better a company does, the more Reputation Capital it will have accumulated. However, if a company is subject to controversy or ESG wrongdoing, it is likely to face a drop in its overall Reputation Capital, which is exactly what happened to Tesla in this instance. Most notably, we witness a sizeable dip in mid-February amid the racism and discrimination allegations, when Tesla’s score dropped from 52.57 to 42.98 in under two weeks.

Additionally, according to Orenda’s ESG Select methodologies, we were able to determine that the topics of both “Inclusion” and “Worker Protection” were very highly engaged, suggesting a much higher than average frequency of these topics being discussed online. Within these topics, the key words “racism”, “racist” and “disgusting” were all flagged as being highly engaged during the month of February.

When comparing this analysis to Tesla’s stock trends during the same time period, we witness a similar dip during the time of the controversy when its stock price reached its lowest point of Q1 at $254.68 on February 23rd – a 36.3% decrease from where it stood at the beginning of the year.

Public Perception

As expected, Tesla was held accountable for the allegations that they faced in February, as was represented by thousands of users taking to social media to voice their disappointment and displeasure. Many laid blame on Elon Musk himself for fostering a poor and discriminatory work environment, some even citing similar issues of discrimination and sexism within other Musk-led organizations, such as SpaceX.

Despite Tesla’s ongoing efforts to improve the industry impact on the environment, it has had its failures in adopting positive social and governance conduct, which have had catastrophic effects on the company’s Social Capital and overall reputation in the ESG landscape.

Whether or not Musk will change his outlook on ESG remains to be seen, but what is for certain is that regardless of his personal perspectives, it has proven to have a very serious and tangible impact on the company both financially and reputably.