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I hadn't known about the S&P 500 ESG Index until today's news that Tesla was delisted from it. Can someone help me understand how S&P actually ranks companies for the Index? Is it objective? Are their methods public?

I've read Wikipedia's Environmental, social, and corporate governance, but it is long, dense and difficult for me to understand (and only briefly mentions S&P).

I was also able to locate S&P Dow Jones Indicies/Core ESG/Overview:

Our core ESG indices include best-in-class indices such as the Dow Jones Sustainability Indices (DJSI), which target the top 10% of ESG performers, as well as broader market indices such as the S&P 500 ESG Index, which target the top 75% of the float market capitalization of each GICS® industry group within their parent indices by S&P DJI ESG Score.

but so far I haven't found the "...and here is how we rank them" bit.


From what I can understand from the news regarding Tesla, the index focuses on the impacts and behaviors related to the operation of the company and does not factor in those of the company's products.

In other words, if I understand correctly (and I certainly might not) a company might be responsible for major deforestation, but if corporate implements a strict paper recycling program in its offices it might still rank highly. (abstract example meant to highlight my current understanding of what the index does and does not take into account)


For reference only; I'm not asking about Tesla specifically but there are some attempts to explain the index in these news items:

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According to news reports Tesla was removed from the S&P 500 ESG Index because it no longer met minimum corporate governance requirements concerning: environmental, social and government standards.

According to S&P Dow Jones Indices,

Tesla was ineligible for index inclusion due to its low S&P DJI ESG Score, which fell in the bottom 25% of its global GICS® industry group peers. It joins Berkshire Hathaway, Johnson & Johnson and Meta

Some of the factors that contributed to Tesla removal from the list are a decline in criteria level scores related to:

  • Tesla’s (lack of) low carbon strategy
  • Codes of business conduct
  • Claims of racial discrimination
  • Poor working conditions at Tesla’s Fremont factory
  • Its handling of the NHTSA investigation after multiple deaths and injuries were linked to its autopilot vehicles

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.

S&P Dow Jones Indices conducts an annual review of companies to ascertain whether they meet its criteria for inclusion on the S&P 500 ESG Index. The Index was first launched in January 2019. From what S&P have published on its website it has a defined methodology for determining which companies are eligible for listing on the Index.

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Environmental investing is hard, and most likely these indices get it wrong.

What you want to do is to value all operations of the company in a hypothetical world where operations damaging the environment are not permitted. You will find that all fossil fuel operations reduce their value to zero. However, it is important to note that they reduce to a zero value, not to a negative value, because the operations can be discontinued. So a company having fossil fuel operations can still have value if it has some other operations too that have lot of value in the hypothetical world.

A good example about why this may be counterintuitive is by far my largest stock investment, Fortum.

Fortum used to be a company that created mainly electricity, using primarily carbon-free generation methods such as hydropower and nuclear power. (It also has some fossil fuel operations in Russia which caused its stock price to reduce recently.)

Then Fortum bought 75% stake of Uniper. Uniper creates electricity using primarily carbon-producing generation methods such as coal power, oil power and gas power, but also some hydropower and nuclear power. (Uniper also has some fossil fuel operations in Russia which caused its stock price to reduce recently, in addition to selling Russian natural gas to European users.)

After buying this 75% stake, the per-kilowatt-hour carbon dioxide production of Fortum skyrocketed. All the newspapers are writing about its dirty carbon footprint.

Many might consider this purchase of Uniper a mistake. But was it?

No, it wasn't.

Firstly, the purchase price was so cheap (valuing the entire company as 8 billion euros) that it made sense to buy Uniper just for the hydropower and nuclear power because I estimate the valuation of these to be about 14 billion euros.

Also existing gas plants have some value. A gas-fired power plant can be modified to be zero emission by modifying it to run on hydrogen, which certainly will be done. Thus the 8.8 gigawatts of gas capacity may be worth 0.3 EUR / watt (constructing new one might cost 0.8 EUR / watt). Furthermore, the underground gas storage capacity of Uniper has value too: in the future, clean hydrogen can be stored there. The coal capacity however has zero value, it can't be used in a hypothetical clean world.

So, today for an intelligent investor Fortum is a very good investment: in the hypothetical world where fossil fuel can't be used to create electricity, the price of electricity rises at times when it's neither windy nor sunny, and the hydropower and nuclear power plants create a lot of profit then, and most likely the gas capacity will be modified to help create electricity at non-windy and non-sunny times using hydrogen produced from electrolysis at windy or sunny times.


So, the question is: do you consider Fortum a good investment for a clean world? Even though it has lots of dirty fossil fueled electricity generation capacity, it actually is a very good investment for a clean world.

Also a second example to think about: when thinking about electric cars, most think about Tesla. Tesla produces about 930 000 EVs per year.

Volkswagen ships about 400 000 EVs per year.

Tesla has a valuation of 735 billion dollars and Volkswagen of 85 billion euros or 89 billion dollars.

So Volkswagen's valuation is 222 500 USD per EV/year and Tesla's is 790 323 USD per EV/year.

With Tesla, you get just the capacity to produce those 930 000 EVs per year.

With Volkswagen, you not only get the capacity to produce 400 000 EVs per year, but also about 9 million non-EVs per year. The capacity that produces those non-EVs can likely be modified to produce EVs with some minor costs, assuming batteries can be sourced from somewhere.

So if you want to invest in EVs, you don't want to invest to Tesla. You do want to invest to Volkswagen.

I don't know why Tesla was delisted but seemed like an excellent move, because a green investor doesn't want Tesla; a green investor wants Volkswagen. You get more for less with Volkswagen.

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    Interesting discussion, but this doesn't really answer the question.
    – LShaver
    May 19 at 13:46

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