Tesla Inc has been cited as one of the world’s leading sustainable companies, and its’ corporate positioning and marketing “hype” has made it a darling of the “green revolution” and the stock market, with its market cap larger than the Indonesian economy.
To begin with, let’s look at Tesla’s purpose; according to Clifford (2019) in her article for CNBC’s “Make It” blog, she states the purpose of Tesla is simply “the acceleration of sustainable energy and autonomy”. [1]
Tesla’s purpose ties into its vision to be the most compelling automobile company in the industry by driving the transition to electrification. Since that article was written, the company’s vision has broadened from not just the electrification of automobiles but to the electrification of transport (through Tesla trucks) and provision of sustainable energy power sources in general, through their solar power systems including their solar panels, inverters, and batteries, such as “Tesla Powerwalls”.
From Elon Musk’s vision for his organisation, the acceleration of sustainable energy is absolutely fundamental, because he believes that this is the “next potential risk for humanity”, and the transition to sustainable energy is “absolutely by far and away, the most important thing”. It can be said that his principle of sustainable energy ties into both the “E” (environmental) and the “S” (social) component of ESG because firstly it addresses the ecological concerns of stakeholders. through things such as GHG emissions (i.e. pollution and carbon emissions), and environmental degradation through oil drilling. The secondary argument is that electrification of transport also tackles the “S” component of ESG by improving the welfare of people, by not having to constantly purchase gasoline, so that money saved can be used for improved “living” purposes. Although, one can argue the benefit of not purchasing gasoline is negated, through the high upfront cost of electric vehicles (with Australia not yet subsidising electric vehicles like many European countries such as Norway), and the cost to the environment to charge the vehicles if not using renewable energy sources.
Furthermore, Musk adds that autonomous vehicles lead to another critical issue of the “S” component of ESG. He argues that autonomy has the potential to “save millions of lives,” through improved safety. According to a 2017 report by Intel, 2035 and 2045, autonomous vehicles could save 585,000 lives “conservatively”. Musk also argues that with self-driving cars, “if you’re on the road, you can spend time doing things that you enjoy instead of in terrible traffic”, which again can be viewed as improving the lives of people.
Through their “2020 Impact Report”, Tesla aspires to do the right thing with regard to sustainability. Being a vertically integrated supplier from battery manufacturing (even possibly lithium mining in the near future) to manufacturing to retail, they would be in a better position to measure Scope 1,2, and 3 emissions, in a simpler way than rival automobile manufacturers. Scope 3 emissions are emissions generated by the user and not tied to the manufacturing (Scope 1) or the supply value chain (Scope 2).
In fact, Tesla’s whole business model is built around delivering sustainable outcomes to its stakeholders, whilst it claims Scope 3 ESG reporting is “repeatedly” underreported in a manufacturing company’s carbon footprint (presumably its competitors such as gasoline and diesel automotive manufacturers). On a side note, it is interesting to see that oil companies (such as Chevron) do not take responsibility for Scope 3 emissions, even though their end use of their products contributes to the bulk of Greenhouse Gas (GHG) emissions.
In its Impact Report, Tesla claims to use real-world mileage and real-world energy consumption from its fleet of over a million cars on the road to calculate GHG savings, and its calculations should become the ESG Standard. By their own admission, they clearly think that through their phase emission reporting, they are the leaders in the field of ESG reporting and it should become the ESG standard. Clearly, they do take their Sustainability Reporting very seriously.
So how does the sustainability of Tesla stack up? The Sustainability Ratings of a company will depend on which index one looks at. For instance, the two main ratings report agents (i.e. MSCI and Sustainalytics) provide completely different ratings for Tesla. MSCI rates Tesla as AAA which falls into the top 30% of MSCI-rated companies, whilst Sustainalytics rate it at 31.3 which is classed as “high risk”. So, which ratings does one believe?
The answer is, one must do their own research, beginning with examining the fundamentals of the operation. The first fundamental: is the business financially sustainable? (Otherwise, the rest of the ESG metrics simply don’t matter).
When examining Tesla, superficially, it seems to create positive value in the categories of societal infrastructure, taxes, and jobs. However, it does use a large number of resources or causes negative impacts mostly in the categories of scarce human capital, GHG emissions, and non-GHG emissions.
Furthermore, when you did deeper there are problems with their tax structures, (which are not transparent), and there have been significant problems with their duty of care to their workforce. Tesla employees have been known for working long hours, and their manufacturing and assembly facilities have recently also reported a poor OHS record; where many workers have been injured on the job, (when benchmarked with their competitors).
There have also been a disproportionate number of lawsuits against the company, for OHS violations, and then there are the large bonuses, (which are not linked to ESG performance) paid to some board members. All this lacks transparency in the governance of the organisation. So, these issues have affected the company’s recent sustainability ratings in the “S” and “G” areas of ESG.
On the “E” (environment) side, according to a study done by the Union of Concerned Scientists, a “full-size long-range electric vehicle increases manufacturing emissions by 68% over the gasoline version”. This in part comes from the mining of Tesla’s metals such as lithium for its batteries and other rare earth metals for its electronics. However, in the same study, it was argued that electric vehicles make up for the “dirty” environmental mining after only 18 months of driving, but this will vary from location to location depending on whether fossil fuels are used for electricity generation and can vary from 35 MPG (in Colorado) to over 135 MPG in (New York state). Overall, on average of their lifetime, gasoline cars have double the number of emissions that electric vehicles have. [8]
On the waste side, Tesla does well in recycling used materials such as spent cells, modules, and battery packs with a 70% recycling rate on spent batteries.
So, the question then becomes, is owning a Tesla an environmentally friendly option? Well, if you look at the whole picture, in terms of ESG, consumer consumption, and supporting corporations, it’s probably not a sustainable option when you compare it to other options such as public transport.
Of course, one can argue that we need to move away from dirty fossil fuels that are controlled by cartels such as OPEC (and has more recently moved into an energy security play created by the Russians), to a shift towards rare earth metals which are primarily mined and controlled by the Chinese. So, we are essentially shifting the geopolitical power play from the Middle East (and recently Russia) to China. Is that sustainable from a supply-chain security aspect? I suspect not.
So, then the question then becomes does my assessment of Tesla agree with the ESG ratings of the company (such as MSCI and Sustainaltyics)? In a way, there is still a lot of hype and confusion around sustainability and potential “Greenwash” around ESG, as each rating measures things in a different way. My judgement is still out on whether I agree with any of those ratings. On some level, I would agree that superficially Tesla is sustainable, but when you drill deeper, you can clearly see that it has its fundamental flaws and is awash with hype and Greenwash which has driven its grossly inflated market capitalization. Would I agree with the ratings- probably not?
So, when making a decision about whether Tesla is sustainable, you really need to do your own research and make your own judgement, based on where you sit on the ESG fence, but remember not to be tainted by your own cognitive biases (in particular your dissonances), so you can see beyond the market hype and Greenwash.
The main thing to study when assessing the sustainability of a company is first to look at its financial viability, which can be broken down into financial and operational performance. After all, if the business is not financially viable and the metrics do not stack up then ESG sustainability and ratings will not matter.
In Tesla’s case, in February 2021, from its market capitalization of US$605 billion, only 14% of its value was based on its earnings, whilst 86% (US$522 billion) of its market cap was based on big market “hype” and the “green” growth delusion, which has pushed sustainable stocks to irrational levels, (potentially even leading to a market bubble).
As global car makers such as GM and Volkswagen and Chinese electric vehicle manufacturers catch up, they could eventually push Tesla out of the market through the global car maker’s ability to scale quickly, and in the case of the Chinese, their ability to “leap-frog” existing technology rapidly.
Then the question becomes can Tesla keep innovating to stay ahead of the market to maintain its growth capability and ultimately its market cap, or will it become just another “Tulip Bubble” or tech stock crash victim as we witnessed in 2001?
[1] https://www.cnbc.com/2019/02/04/elon-musk-on-the-why-and-purpose-behind-tesla.html
[2] https://panmore.com/tesla-motors-inc-vision-statement-mission-statement-analysis
[3] https://www.cnbc.com/2019/02/04/elon-musk-on-the-why-and-purpose-behind-tesla.html
[4] https://newsroom.intel.com/news-releases/intel-predicts-autonomous-driving-will-spur-new-passenger-economy-worth-7-trillion/
[5] https://www.tesla.com/ns_videos/2020-tesla-impact-report.pdf
[6]Union of Concerned Scientists (2015) “Cleaner Cars from Cradle to Grave” https://youtu.be/x1a2leE-YaA
[7] ibid
[8] ibid
