Advisors and end clients have probably heard that Tesla was recently dropped from the S&P 500 ESG Index, as the news was originally picked up by some media outlets last week. More articles were published when Elon Musk called ESG “a scam weaponized by phony social justice warriors” and Cathie Wood called the removal “ridiculous.” I’m not here to defend ESG investing or justify why this stock was one of more than a dozen added or removed from an index, but let’s better understand what happened and the impact for ETFs.
S&P Dow Jones Indices put out a press release in April announcing that Tesla and other companies were removed from the S&P 500 ESG Index, but few people likely noticed.
In a blog post further detailing the annual rebalancing of the S&P benchmark last week, Maggie Dorn, senior director and head of ESG Indices, North America, at S&P Dow Jones Indices, explained “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.”
There are two ETFs that track the same S&P 500 ESG Index - the Xtrackers S&P 500 ESG ETF (SNPE) and the SPDR S&P 500 ESG ETF (EFIV), which have recently managed a combined $1.3 billion in assets. However, these are not the only ETFs with S&P 500 and ESG in their names. For example, the iShares ESG Screened S&P 500 ETF (XVV) tracks a different S&P index, and I believe that when it next rebalances, Tesla will remain a holding.
However, names only tell you so much. Just like the iShares S&P 500 Value ETF (IVE ) and the Invesco S&P 500 Pure Value ETF (RPV ) or the SPDR Portfolio S&P 500 High Dividend ETF (SPYD ) and the Invesco S&P 500 High Dividend Low Volatility ETF (SPHD ), which have similar-sounding names but different security inclusion criteria, XVV and SNPE/EFIV are designed differently.
XVV eliminates exposure to certain controversial business areas, such as tobacco or weapons, and owns approximately 450 large-cap U.S. stocks. Companies like Altria and Boeing are not part of the fund. In contrast, SNPE and EFIV own shares of just over 300 companies that have relatively high individual environmental, social, and governance scores while seeking to have similar industry and sector exposures as the broader S&P 500 Index.
According to Dorn, Tesla’s relative ranking within the automobiles and components industry declined from the previous year. Tesla’s lack of a low-carbon strategy and codes of business conduct were some of the factors that contributed to its lower ESG score, as were claims of racial discrimination and poor working conditions at Tesla’s Fremont factory. While ESG is often knocked for limited transparency, S&P Dow Jones Indices provided Musk and other Tesla supporters with meaningful clarity as to why the company is not part of the S&P 500 ESG Index.
The absence of Tesla in SNPE and EFIV helps explain why the ETFs recently had a 9% stake in the consumer discretionary sector, less than the recent 11% weighting in the SPDR S&P 500 ETF (SPY ) and the 12% position in XVV. Berkshire Hathaway, Chevron, Johnson & Johnson, Home Depot, and Wells Fargo are some other prominent companies that are also not part of the S&P 500 ESG Index. However, General Motors is a constituent, and Twitter, which Elon Musk is attempting to acquire, was just added this year.
If you are not convinced that it is important to look at what an ESG ETF owns, consider that iShares licenses some ESG indexes to track from the MSCI as well. The iShares ESG Aware MSCI USA ETF (ESGU) holds Tesla, but the iShares ESG Advanced MSCI USA ETF (USXF) does not; I would be shocked if Musk was aware of this. USXF has different criteria than ESGU. Even when the two MSCI-based iShares ETFs have overlapping positions, the weightings can be different. For example, Microsoft has a 6% stake in ESGU but a 12% stake in USXF, in part because USXF does not own Apple.
While we wait to see if Tim Cook or Warren Buffet, one of Apple’s most prominent shareholders, refers to ESG in disparaging terms given MSCI’s exclusion of the stock, let’s all agree to do some homework this week: Look inside any ESG ETF we own or are considering owning.
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