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Tesla is far from having great ESG ratings and scores. Tesla produces highly-efficient EVs, but it has several sustainability issues, including the environmental impact of its batteries, poor working conditions and the eccentric and unusual governance of Elon Musk.

Intro

Tesla, the global leader in EV (electric vehicles) by units produced, after much expectation and speculation has joined the S&P 500 on 21st December 2020. Tesla had a great year in 2020, seeing its stock price soar by more than 600%.

As of December 2020, Tesla is not only the largest EV by number of units produced (Q1-Q3 2020: 318,350 units), but it is the largest automaker by market cap. Reaching a valuation of around $600 billion, Tesla has a market cap 3 times larger than Toyota, the second-largest automaker. However, Tesla is far from reaching the revenue or production volume of Toyota or Volkswagen, which deliver around 10 million vehicles per year each.

In this post, we will not analyze Tesla’s valuation, nor its stock price. Those analysis are already being done by highly specialized analysts, both from a bullish and a bearish perspective.

What Your Green Wealth is interested to know is how sustainable Tesla is as company and what is the potential social and enviromental that its main products – electric vehicles – are bringing to the transportation industry. We will also assess how well Tesla is fulfilling its mission:

“Tesla’s mission is to accelerate the world’s transition to sustainable energy. Tesla believes the faster the world stops relying on fossil fuels and moves towards a zero-emission future, the better.”

Tesla, 2019 Impact Report

Tesla’s sustainability background

Despite Tesla’s clear mission and strong sustainability focus, Tesla has not been very forward when it comes to disclosing its social and environmental impact. Tesla’s first impact report was only published in 2018. Prior to 2018, Tesla mainly focused on updating a webpage with the estimated emission reductions caused by its electric vehicles, and, according to The Transition Pathway Initiative, scored zero in climate performance for not disclosing policies and programs related to ESG topics.

When it comes to Tesla’s governance, a good example of bad stakeholder management is Elon Musk’s tweet from April 2017. When confronted by investors demanding better corporate governance, Elon Musk tweeted “This investor group should buy Ford stock. Their governance is amazing …”.

At Tesla’s 2019 Impact Report, they clearly indicate that sustainability is not their top priority, by stating: “Making a significant and lasting impact on environmental sustainability is difficult to achieve without securing financial sustainability for the long term”.

Let us look deeper into each aspect of Tesla’s sustainability and its ESG ratings.

What is Tesla ESG rating?

Several ESG rating agencies have rated Tesla on ESG criteria. Since those agencies use different criteria, we do not expect to find a complete consensus. But we do find similarities in their assessments.

According to Sustainalytics, Tesla has an ESG risk rating of 31.1 points, which is classified as high risk (the lower; the better). Traditional automakers usually do not perform well in ESG, due to their high emission products. For comparison, Volkswagen has an ESG risk rating of 41.1 and Toyota Motor Group has an ESG risk rating of 29.7.

Tesla’s ESG risk rating is split into 2.8 points for Environmental, 17.3 points for Social, and 11.0 points for Governance. Sustainalytics ranks Tesla at the 52th position out of 71 companies in the automobile industry group. They also indicate Tesla’s controversy rating as ‘Significant’ (3 out of 5), being the main drivers Corporate Governance and Labour Relations.

MSCI has been downgrading Tesla ESG since it started measuring it. In 2017, MSCI gave Tesla a ESG rating of ‘AAA’, reducing it to ‘AA’ in 2018 and now, in 2020, it rates Tesla as ‘A’. When comparing to its peers in the automobile industry, MSCI indicates that Tesla is a laggard in Labour Management and, different than other agencies, as a leader in Corporate Governance.

S&P Global, at the ESG Industry Report Card: Autos and Auto Parts, rates Tesla as B-/Negative. They expect Tesla’s ESG risks to be high for governance and social risk factors, while environmental risks to remain low due to the company focus on electric vehicles. For S&P Global the main governance risks are Elon Musk’s dominant role in the company and its potential impact on corporate governance. The main social risks are related to “product liability, government scrutiny, and further regulation”.

How does Tesla perform in the Environmental criteria?

As expected, due to the nature of its EV business, Tesla has a good rating in Environmental criteria. However, as an automaker we need to look beyond tailpipe emissions, and evaluate the environmental impact of Tesla cars during full lifecycle, from cradle to grave.

Manufacturing: Metal sourcing and production of batteries adds C02 emissions from the start

During manufacturing, EVs (electrical vehicles) have on average a higher environmental impact than conventional ICE (internal combustion vehicles). The added environmental impact is mainly driven by the metals used in batteries and the resources and energy needed to mine those metals (lithium, nickel, and cobalt). Mining is a water-intensive process that can deplete local aquifers and impact the local ecosystem. When mining for lithium only 0.2% of the material extracted is useful, the remaining 99.8% of the material is returned to the ground.

The emissions associated with the manufacturing of Tesla batteries are dependent on the factory’s location and the energy source used in the process. For example, assuming a battery of 75 kWh and a lifetime of 150,000 km (Tesla Model 3), when produced in China – which has coal as the main source of electricity – emissions would be 100kg CO2eq/kWh or 50g CO2/km during the car lifetime. When manufactured in Nevada, Tesla’s Gigafactory – expected to run 100% on renewable – emissions would reduce by almost 40%, to 61kg CO2eq/kWh or 30g CO2/km during the car lifetime.

Operation/Use: EVs have zero emissions at the tailpipe, but fuel cycle is not free of emissions

During operation and use, Tesla EVs are expected to have a smaller environmental impact than ICE, since EVs have zero tailpipe emissions and they enable the use of cleaner energy sources. However, here again the emissions associated with the vehicle use are dependent on the energy sources available at each recharging location: the upstream fuel cycle.

For example, for the same Tesla Model 3, emissions associated with the energy used to charge the batteries (fuel cycle) could add 59g CO2/km if charged in the US, 26g CO2/km in the UK, or only 7g CO2/km in France.

End-of-life: Implementing battery repurposing and recycling is critical to reducing the environmental impact of EVs

After driving the expected 150,000 km during car lifetime, the most important decision for Tesla is to find a destination for its batteries. According to Tesla’s 2019 Impact Report, its batteries are designed to outlast their cars and they have ambitions to design batteries that could last for 1 million miles. However, it is not clear how Tesla will repurpose and recycle its batteries.

Recycling large lithium-ion battery packs of more than half a ton is not an easy task. At Tesla’s 2019 Impact Report they indicate that they are not yet recycling batteries at large volumes. They are mainly recycling pre-consumer scrapped lithium and currently working with third-party recyclers (e.g. Umicore) to process the scrap and a few end-of-life batteries.

In the same report, Tesla indicates its recycling ambitions without giving out many details about the process, costs and timeline for implementation:

“Tesla is currently developing a unique battery recycling system at Gigafactory Nevada that will process both battery manufacturing scrap and end-of-life batteries. Through this system, the recovery of critical minerals will be maximized along with the recovery of all metals used in Tesla battery cells, such as copper, aluminium and steel. Our ultimate goal is to develop a recycling processes that has high recovery rates, low costs, and a low environmental impact.”

Tesla, 2019 Impact Report

How efficient and clean are Tesla’s electric vehicles?

Tesla’s electric vehicles are among the most efficient cars when it comes to energy consumption per kilometer, or Miles Per Gallon equivalent (MPGe), as the EPA (the United States Environmental Protection Agency) assess the fuel economy of all-electric vehicles (1 gallon of gasoline = 33.7 kWh).

According to Fueleconomy.gov, Tesla Model 3 (2020) has the highest efficiency, reaching 141 MPGe. Right after is Hyundai Ioniq models 2019, 2018 and 2017, with 136 MPGe.

Fuel economy during operation is a relevant factor to determine the electric vehicle’s efficiency in terms of distance performed with one unit of electricity. However, when looking at Tesla’s sustainability, we need to access how Tesla’s vehicles compare to other EVs by amount of CO2 emissions during the vehicle’s lifetime.

Below we have the CO2 emissions per distance driven for four electric cars (Tesla Model 3, Tesla Model S, Hyundai Ioniq and Nissan Leaf) at three different locations (Los Angeles, Austin and Australia).

EV Tool (Union of Concerned Scientists, USA):

Maker	Model	Year	Los Angeles, g C02/mile	Austin, g C02/mile
Tesla	Model 3 Standard	2019	73	130
Tesla	Model S Standard	2019	92	155
Hyundai	Ioniq	2019	70	125
Nissan	Leaf (40 kWh)	2019	86	150

Green Vehicle Guide (Australian Government):

Maker	Model	Year	Australia, g C02/km
Tesla	Model 3 Standard	2019	116
Tesla	Model S Standard	2019	152
Hyundai	Ioniq	2019	103
Nissan	Leaf (40 kWh)	2019	150

According to the Union of Concerned Scientists, Hyundai Ioniq has slightly lower emissions per mile than Tesla Model 3. According to the Australian Green Vehicle Guide, Hyundai Ioniq generates 11% fewer emissions in gCO2/km than Tesla Model 3.

Tesla Model S and Nissan Leaf generate significant more emissions per distance when compared with the most efficient electric vehicles available in the market: Tesla Model 3 and Hyundai Ioniq.

How does Tesla perform in the Social criteria?

When it comes to the social criteria in ESG, Tesla has issues on at least two fronts: human rights within its supply chains and labour management at its factories.

Supply Chain: At the 2019 Impact Report, Tesla recognizes the high risk of human right issues on its cobalt supply chain, especially driven by the existence of child labor in the Democratic Republic of the Congo (DRC). Tesla indicates that it is working to increase transparency on its cobalt supply chain and its ultimate goal is to eliminate cobalt completely from its batteries. However, Tesla has not been clear about when and how this will happen.

Workers at Tesla factories: Tesla labor management is not good either. There are several examples where Tesla had violated labor rights and forced workers to work in unsafe conditions. Below is a list of Tesla’s main labor related issues:

• Injury rates above average and under-reported
• Firing workers after allowing them to take unpaid leave during COVID-19
• Blocking workers’ organizing a union
• Stopping production line of Models S and X for 18 days, giving workers one week of pay and one week without pay, while suggesting that workers could work for free (volunteer) at other tasks.

How does Tesla perform in the Governance criteria?

Governance is another area where Tesla does not excel. Besides being known for the extremely optimistic promises of its CEO Elon Mask, and constantly missing production deadlines, the main governance issue is Tesla’s Board of Directors, which has strong ties with other Musk’s ventures, such as SolarCity and SpaceX.

• SolarCity deal: during 2016/2017, Tesla was sued by shareholders claiming that the acquisition of SolarCity, a company managed by Elon Musk’s cousin, was “a bailout for a financially troubled SolarCity”
• U.S. Securities and Exchange Commission (SEC): in 2018, Elon Musk was forced to step down as chairman of Tesla’s Board of Directors, “as part of a $40 million accord with the SEC to settle fraud charges related to his tweets about taking Tesla private”.
• Board of Directors ties: the existing conflicts of interests at Tesla’s Board of Directors did not end with the acquisition of SolarCity. Several members of Tesla’s Board of Directors have ties with other Musk’s companies, including SpaceX, Musk’s privately held rocket company.
• Elon Musk’s compensation package: in 2018 the Tesla’s Board of Directors approved and unusual compensation package for CEO Elon Musk. The compensation is heavily dependent on share price and market cap. If all the targets are achieved Musk would receive $55 billion in equity value, the highest compensation of any CEO in US corporate history.

Are EVs the solution for climate change?

Tesla has been designing low-emission luxury cars that are appealing to consumers in the United States (the country with most road vehicles per inhabitants), and other rich economies. It is also a fact that road transport accounts for 15% of global C02 emissions, thus by focusing on electric vehicles to eliminate tailpipe emissions, Tesla is making investments in the right direction.

However, it is also known that individual transportation is not the most effective and clean way to move passengers from one point to another. Ultimately, to achieve the environmental targets necesary to avoid climate disruption, we need to change our car-centric culture and invest in public transportation, including electric buses, trains and bikes.

Conclusion

Despite not being the best-in-class in sustainability and ESG ratings, Tesla is producing high-energy efficient vehicles and is investing heavily to mitigate its environmental risks, by improving the management and transparency at its supply chain, and developing better recycling processes and technology for its batteries.

A lot of work is still needed from Elon Musk and his management team to improve the company’s social impact and corporate governance.

The legacy of Tesla: one fact that cannot be denied is Tesla’s influence in the electric vehicle industry and how the company was able to create enough momentum for EVs. From the start, Tesla challenged the traditional ICE automakers and was able to fast-track the development of electric vehicles at a global level.

Bonus: ESG ETFs with most Tesla exposure

Ticker	Fund Name	TSLA Allocation	TSLA Market Value
NULG	Nuveen ESG Large-Cap Growth ETF	4.27%	$18.16M
ECOZ	TrueShares ESG Active Opportunities ETF	3.62%	$250.98K
USXF	iShares ESG Advanced MSCI USA ETF	3.51%	$2.64M
SUSL	iShares ESG MSCI USA Leaders ETF	3.00%	$82.22M
USSG	Xtrackers MSCI U.S.A. ESG Leaders Equity ETF	2.95%	$82.71M
ESG	FlexShares STOXX U.S. ESG Impact Index Fund	2.63%	$2.99M
NULC	Nuveen ESG Large-Cap ETF	2.57%	$504.44K
IQSU	IQ Candriam ESG U.S. Equity ETF	2.00%	$6.44M
SUSA	iShares MSCI USA ESG Select ETF	1.66%	$36.35M
ESGU	iShares ESG Aware MSCI USA ETF	1.45%	$187.02M
ESGG	FlexShares STOXX Global ESG Impact Index Fund	1.39%	$1.77M
ESGV	Vanguard ESG U.S. Stock ETF	1.37%	$36.13M

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