Industry Updates

ETF Wrap: Musk’s relationship with passives sours following Tesla’s S&P 500 ESG index removal

The difficult relationship between Tesla and passives, Grayscale entering Europe and BlackRock's bold fixed income predictions made headlines this week

Jamie Gordon

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Tesla was unceremoniously removed from the S&P 500 ESG index this week, however, this is not the first time the electric vehicle manufacturer and its CEO Elon Musk have had friction with the passive investment industry.

In September 2020, Tesla was already among the largest listed companies in the US and had booked four consecutive quarters of profits – a necessary requirement for S&P 500 inclusion – yet was snubbed by the index’s discretionary committee during its Q3 rebalance. Instead, it had to wait until Q4 to enter the popular benchmark.

Even more challenging was its eventual arrival into the S&P 500 ESG index. The company scored only 28 on environmental metrics and six on social metrics at the start of 2021, with S&P Dow Jones Indices (SPDJI) highlighting its lack of environmental reporting, climate strategy, environmental policy and management systems as areas of weakness.

Thankfully, its governance score jumped from 21 to 49 between 2019 and the start of 2021, which meant it escaped the lowest quartile of ESG performers in the automobile sector and earned a place in the S&P 500 ESG index in April last year.

This membership was short-lived, however, after Tesla was booted out of the index on 2 May, with SPDJI highlighting concerns around autonomous vehicle safety, alleged discrimination and continued lack of ESG reporting meant it underperformed others within its sector.

Many have and will continue to question the index provider’s decision, given Tesla is seen by many as the largest ‘green’ company in the world and also because the index retains an almost 7% weighting to fossil fuels including a top-ten spot reserved for Exxon Mobil.

On the other hand, ESG investing is only as good as the data underlying it. Tesla serves as a harsh reminder that no company will get a free pass to be flippant with the requirements of corporate ESG – and the purpose it serves as a tool for risk management.

Opposing this dynamic, Musk took to Twitter to say “S&P has lost their integrity” and “ESG is a scam. It has been weaponised by phony social justice warriors”. The statistical-minded teams behind ESG ratings might take offence at the last remark.

This is not the first time Musk has gone after passives this year. Earlier this month, he warned "passive has gone too far" by owning too great a percentage of the market while making increasingly empowered decisions on behalf of investors "that are contrary to their interests".

The world’s largest crypto asset manager enters Europe 

Grayscale, an asset manager housing at least 75% of assets in crypto products globally, made its debut this week by launching its future of finance ETF across Europe.

The firm is yet to launch a crypto exchange-traded product (ETP) despite offering the world’s largest bitcoin trust. It is looking to convert this product into ETF format in the US, however, its application to do so expires on 6 July, with the Securities and Exchange Commission (SEC) appearing unlikely to budge before the deadline.

This leaves certain questions on the table such as whether the firm would look to Europe to launch its first crypto ETP, who it will partner with on its next product, whether it plans to raid European crypto ETP issuers for talent and even if it would consider acquiring a rival to use as a launchpad to facilitate its expansion this side of the Atlantic.

Bond ETFs to double in eight years? 

Elsewhere this week, BlackRock predicted global fixed income ETF assets would shoot to $5trn by the end of the decade, despite ongoing challenges.

The world’s largest manager said the market share of bond ETFs has shot up to 24% of the ETF market’s roughly $10trn assets under management (AUM) today, up from 14% five years ago. This would mean the issuer expects bond ETF AUM to roughly double over the next eight years.

Since 2017, inflows have been spurred by the rapid building out of the fixed income ETF roster, regulatory changes allowing US insurers to access the products and the growing popularity of electronic trading. 

Looking ahead, BlackRock has forecasted active fixed income ETF AUM to increase fivefold, to $1trn, by 2030.

ETF Wrap is a weekly digest of the top stories on ETF Stream

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