Tesla owner Elon Musk was furious, labeling the entire notion of ESG—which judges corporations’ performance based on environmental, social, and governance metrics—a “scam” on Twitter. The ESG movement had been “weaponized by phony social justice warriors,” he added.

Musk’s gripe with the S&P 500 was that it was unreasonable that Tesla, which held 14% of the EV market share last year, would be removed from the list “despite Tesla doing more for the environment than any company ever!,” while oil companies including ExxonMobil are permitted to remain.

But while Tesla may have played a pivotal role in kick-starting the electric car revolution and game-changing developments in battery storage technology, the company’s decline on the S&P 500’s ESG list appears to have happened for other reasons.

Tesla’s ESG drop

“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,” Margaret Dorn, head of ESG Indices for North America, wrote in a Tuesday blog post.

Dorn identified two separate issues that impacted Tesla’s lower ESG score: complaints of racial discrimination and poor working conditions in Tesla factories, and the company’s response to a regulatory investigation into multiple deaths and injuries that had been linked to Tesla’s self-driving 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,” Dorn wrote.

The divergence in how Musk and S&P 500 view ESG criteria is representative of an industry that is still painfully subject to individual interpretation, and trying to figure itself out.

What does ESG even mean?

Investment firms use ESG ratings to guide them in classifying different stocks as suitable for a more sustainable investing portfolio. But the fuzzy rules of the new investment trend has led to confusion over how the system works, and many portfolios immediately liken a company stamped with a good ESG rating as a promising target for sustainable investing.

The ESG movement has been booming in recent years. ESG assets surpassed $35 trillion worldwide in 2020, a jump from $30.6 trillion in 2018. The industry could be worth as much as $53 trillion by 2025, a third of all projected assets under management by then.

The fervent interest in ESG has pushed many companies to adopt its principles, out of fear that their stock would suffer if they don’t. But the frenzy of ESG investing has also come with a good amount of confusion over who sets the rules, and what its principles actually are. 

Several of the oil companies on the current ESG Index list, including ExxonMobil, are there by virtue of their commitments to improving their ESG ratings and initiatives to go carbon neutral, despite recent regulatory probes as to whether the company lied to investors and the public with regards to how much it knew about its activities impact on climate change.

In an interview this week with Reuters, chief investment officer at Toscafund Hong Kong, Mark Tinker, said that Musk was right in saying that ESG principles could be easily retooled and interpreted, and also that a company’s commitment to help the environment can “mean what you want to.”

“The whole thing is very subjective,” Tinker said.

In February, ESG expert and author Michael Baxter made an interesting analogy for Tesla’s already declining ESG score: figure skating. 

Baxter wrote that like in skating, judges can give high rewards for certain accomplishments, such as creating a product that helps reduce fossil fuels in circulation, as Tesla has done. But in other areas, Musk and his company have been less successful.

“Within the very specific category called ‘developing a product that helps beat climate change,’  Tesla scores top marks—plus three,” Baxter wrote. “But for transparency, labor relations, adherence to governance, for example, having a CEO who doesn’t send out random tweets, Tesla scores poorly.”