“You can’t have a racial equity lawsuit and consider it a top ESG name,” she added.
Passive index funds, which collectively direct about a third of all assets invested in the stock market, are required to match their portfolios to the index they track. Getting included or removed from an index can impact a company’s stock price. General Electric’s shares, for example, fell 3 percent shortly after it was announced in mid-2018 that the company, an original member of the Dow Jones industrial average, was being removed from that index.
But the drop in Tesla’s share price more than 30 percent since the end of March was more likely to result in concerns about Mr. Musk’s offer to buy Twitter and a broader shift in how investors view technology stocks.
How Elon Musk’s Twitter Deal Unfolded
A blockbuster deal. Elon Musk, the richest man in the world, capped what seemed to be an improbable endeavor by the famously mercurial billionaire to buy Twitter for roughly $ 44 billion. Here’s how the deal unfolded:
S&P reported that there were $ 65 billion in assets invested in funds tied to the index at the end of December 2020, the most recently available figure. That’s far smaller than the $ 13 trillion that is tied to the funds more widely following the S&P 500 index, of which Tesla is currently a member. That $ 65 billion is also small compared to Tesla’s overall market value of about $ 750 billion. And only a portion of the holdings of those ESG funds are in Tesla.
What’s more, of the $ 65 billion tied to the ESG index, only $ 11 billion of that money is invested in passive index funds, which would require selling their Tesla stakes. The rest of the money is in the funds that benchmark their performance against the S&P 500 ESG index. Many of those funds are actively managed by portfolio managers. Those funds are not required to sell their Tesla holdings, but they may not do so in order to deviate too far from the index that they are compared to investors.
“Tesla is simply not an open-and-shut ESG case,” said Jon Hale, who directs sustainability research at mutual fund tracking firm Morningstar. “While it is clear 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 those issues concern ESG investors.”
Several other prominent companies were also dropped from the index in April when S&P determined they no longer met the criteria for membership. They include Chevron, Delta Air Lines, Home Depot and News Corp.
Even if the ejections do not impact the value of a company’s shares, they could have an impact on a company’s actions. “Elon Musk and Tesla may be the exception,” Mr. Hale said. “But the flip side is that very few companies want ESG laggards in the current environment.”