As businesses face an escalating demand for ethical sourcing and operations, ESG has evolved from an idealized concept to a radically divisive topic in a matter of just months. With consumers and investors continuing to place significance and scrutiny on how companies approach ESG, leaders of major organizations are becoming more vocal about how and if it fits into the business landscape. What’s behind the loudest opposition to ESG scoring, and what does that mean for leaders in this space?
Elon Musk brands ESG a menace
Although anti-ESG sentiment has been simmering almost since the inception of the term, one of the world’s most prominent billionaires has recently trumpeted the quiet part out loud. In early April, Elon Musk of Tesla and SpaceX fame tweeted in simple terms: “I am increasingly convinced that corporate ESG is the devil incarnate.”
Regardless of personal opinions on Musk’s business decisions or leadership style, there is no denying that his penchant for frequent and controversial social media posts has an outsized influence on millions of people. His condemnation of ESG is a bellwether for the year of “Anti-ESG” individuals and organizations. We’ve seen states like West Virginia and Texas attempting to cut government funding to fund managers that don’t embrace fossil fuels, and the creation of an asset management company backed by Bill Ackman and Peter Thiel that explicitly rejects investments with an ESG theme or “political” agenda.
There is clearly a movement among some leaders to stomp out ESG, but understanding why these individuals are pushing so hard against the current requires some deeper investigation.
Optics are no longer everything
In the case of Musk’s outburst against ESG, it’s clear that we are undergoing a major shift in which looking good is no longer a substitute for doing good–or at least mitigating harm–and proving it with metrics. For a long time, Tesla marketed through the lens of ESG by focusing on how electric vehicles produce fewer emissions than gas-powered vehicles. However, ESG has become more complex and Tesla has failed to keep up. In May, shortly after Musk’s first incendiary tweet, Tesla was booted off the S&P 500 ESG Index.
In response, Musk fired off another tweet insisting that: “ESG is a scam. It has been weaponized by phony social justice warriors.” This sentiment was echoed in Tesla’s 2021 Impact Report, which stated that current ESG evaluation methodologies ”are fundamentally flawed” because they lack focus on the company’s “real-world impact” on society and the environment.
In contrast, an explanatory blog from the S&P’s Head of ESG Indices names lack of low-carbon strategy and codes of business conduct, allegations relating to racial discrimination and poor working conditions at one of its factories, and the company’s handling of deaths and injuries linked to its driver-assistance systems as reasons for exclusion. The bottom line is that while other companies have made strides in collection and disclosure ESG metrics, Tesla has remained stagnant and has therefore been outpaced.
Digging deeper into Tesla’s climate impact
The S&P isn’t the only index which ranks Tesla low on ESG. One report by non-profit As You Sow ranks 55 of the biggest tech and non-tech companies on their climate impact, and Tesla was rock-bottom with a score of zero.
Tesla and others point to companies like Exxon Mobil and Chevron ranking higher as proof that ESG rankings make no sense, but the sticking point here is that those companies are providing voluminous metrics showing that they are making progress toward lowering emissions while Tesla continues to be purposefully opaque.
For a leader whose brand is built on innovation, Musk’s rejection of evolving ESG standards is somewhat baffling. Powerful tools already exist to measure ESG progress, stakeholders expect to see those metrics and comparable companies are already complying with the new demands. What is holding Tesla back?
Factoring in a dirty supply chain
As ESG evolves, companies are expected to demonstrate that their entire supply chains are in alignment with core values–including those related to Environmental, Social and Governance issues. This widening of focus is causing trouble for companies like Tesla, which must source materials that are difficult to secure and steeped in ethical ambiguity.
The company’s battery packs require cobalt, lithium and nickel, among other rare metals–and all of them are highly problematic to source. For example, 60 percent of the world’s cobalt comes from the Democratic Republic of the Congo, where human rights violations are rife and two-thirds of the population lives in poverty. Mining for lithium and nickel contaminates soil and air, depletes critical water tables and results in habitat destruction for both people and wildlife. Despite these issues, the 2021 Impact Report states that “Tesla believes that there is low risk of, and have found no evidence to date of Tesla causing, contributing to or being linked to modern slavery, child labor or human trafficking in our supply chain.”
However, the report does little to clarify what measures the company is taking to vet and audit suppliers for climate and social impact. Taking this into account, it’s clear that Tesla’s supply chain is a major detractor from the squeaky-clean image it has cultivated of its end product helping to save the planet. Now that supply chain scorecards are poised to become the norm, it’s no longer possible to gloss over the partnerships that contribute to emissions and habitat destruction–both critical elements of ESG ratings.
Fighting ESG is fighting transparency
Tesla’s disclosure failures are finally catching up to it, as other companies are evolving on collecting and sharing metrics up and down the whole supply chain. The loudest pushback against ESG seems to be coming from those who can’t or won’t keep up with evolving technologies that shine light on every area of procurement and operations.
The new SEC draft rule on emissions disclosures highlights how the greatest detractors of ESG are the companies that will be exposed as frauds if they actually have to hand over reports that don’t just cherry-pick the positives.
Today, trust must be earned through transparency and must be continually reinforced through rigorous reporting
ethiXbase as an ESG ally
For companies with a commitment to ESG beyond optics, being able to prove responsibility throughout the extended supply chain is undeniably a competitive edge, so now is the time to invest in tech like ethiXbase to build ethical supply chain partnerships and back up your ESG claims with solid metrics.