“You can not take a race capital claim and be considered the best ESG name,” he added.
Passive index funds, which collectively account for about one-third of the assets invested in a stock exchange, are required to have their portfolio match the index they control. Inclusion or removal in the index may affect the stock price of the company. Shares of General Electric, for example, fell 3 percent after it was announced in mid-2018 that the company, the original member of the Dow Jones Industrial Average, had been removed from the index.
But the more than 30 percent drop in Tesla shares since the end of March was likely the result of concerns about Mr. Musk’s offer to buy Twitter and a broader change in investors’ vision for technology shares.
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S&P reports that at the end of December 2020, $ 65 billion in assets were invested in index-related funds, the most recent figure available. That’s much less than the $ 13 trillion associated with the S&P 500 index of which Tesla remains a member. That $ 65 billion is also small compared to Tesla’s total market value of nearly $ 750 billion. And only part of these ESG funds are in Tesla.
Moreover, of the $ 65 billion associated with the ESG index, only $ 11 billion of this amount is invested in passive index funds that will be required to sell Tesla shares. The rest is in funds that assess their performance against the S&P 500 ESG. Many of these funds are actively managed by portfolio managers. These funds are not required to sell their Tesla holdings, but they can do so to avoid going too far in the index they compare to investors.
“Tesla is simply not an open and closed ESG case,” said John Hale, who is leading a sustainability study at Morningstar, a mutual fund monitoring firm. “While it is clear that the company’s product is beneficial to the environment, Tesla is now a large company and it also has an impact on employees and customers, and these issues concern ESG investors.”
Several other well-known companies were also removed from the index in April when S&P found that they no longer met the membership criteria. These included Chevron, Delta Air Lines, Home Depot, and News Corp.
Even if the eviction does not affect the value of the company’s shares, they may affect the company’s actions. “Elon Musk and Tesla may be exceptions,” Mr. Hale said. “But the other side of it is that very few companies want ESG to lag behind in the current environment.”