Tesla’s governance is stuck in reverse

Tesla’s governance is stuck in reverse

We have sold Tesla from our Global Sustainable Equity portfolios, having held the shares since early 2019. This sale follows a downgrade in our internal sustainability ranking.

 

We originally viewed Tesla as a compelling opportunity from both an investment and sustainability perspective and it has been an extremely profitable contributor to performance.

 

Its products have unquestionably changed the automotive industry for the better. In response to the technological advances and competitive threats brought by Tesla, almost all major automotive manufacturers have now committed to producing fully electric vehicles. In a sector that is responsible for around 12% of the world's greenhouse gas emissions, that is a materially positive impact that Tesla can take enormous credit for.

 

But we also knew questions would be raised around the governance practices at the company and how these fit within an ESG framework. Indeed, we had our own questions and identified the areas where we wanted to see improvement.

 

Our process recognises the importance (and return-generating potential) of sustainability improvement. It would be remiss to expect every aspect of ESG at a company to be perfect and we are willing to invest in younger companies that are still improving their practices in this respect.

 

There has been much written about Tesla’s investment in Bitcoin, with suggestions that the company has destroyed its environment credentials. It is important in these situations to look through the headlines and come to a balanced conclusion based on the facts. We have analysed the environmental impact of Tesla’s bitcoin investment based on estimated emissions from the highly energy intensive digital currency and have concluded that this part of the story is something of a red herring. The investment did not move the dial much for Tesla’s own footprint and we were still very positive around the company’s product impact and environmental credentials. 

  

The canary in the coal mine

We promise our clients that our sustainability analysis will look for improvements in ESG factors and improving governance practices was a central part of the thesis as the company grew. The decision by Tesla to invest 8% of its working capital in Bitcoin, therefore, raised questions around governance that we have grappled with since first investing in 2019. This confirmed to us that the Board has very limited influence in checking the power of Elon Musk. Further concerns relating to pay for executives, continued pledging of shares from executives, and a recommendation from the Board blocking a simple majority vote standard for shareholders at the latest AGM, painted a worsening governance picture for us.

 

While Tesla’s business has grown and matured, its governance standards have not. This latest foray into BTC only confirms to us that TechnoKing remains the only person calling the shots in Tesla’s HQ; to us, that is no longer good enough.

 

Ultimately, we have stuck to our process: investing in a sustainability Improver and tracking the most material ESG factors for progress. Our independent responsible investment team has observed a material deterioration in these factors, and so has downgraded Tesla to a ‘Laggard’, triggering a sale.

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Euan Ker

Sustainable Investment Analyst

Euan Ker is a Sustainable Investment Analyst. He is responsible for analysing and monitoring environmental, social and governance factors within the Global Sustainable Equity Strategy.

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