Nothing says you’re a sustainable finance buff like complaining about ESG ratings. At this stage, it is almost a rite of passage, like the Sorting Hat scene in Harry Potter (shout out to “RAVENCLAW”).
I can’t think of anything in sustainable finance that is easier to critique (and I would be lying if I hadn’t done my bit of it, including at one point suggesting they should be abolished altogether).
So, predictably perhaps, I feel compelled to defend them. And no better company to use as a case study than Tesla.
If you haven’t lived under a rock these past few years, you may have heard Tesla’s CEO Elon Musk tear into ESG ratings every time his car company failed to get a perfect score.
Predictably, the court of public opinion (read: mainstream media) was a willing conduit for this message. Voices within the industry also expressed their doubts that a company like Tesla should have anything but a triple-A rating. How could amazing, beautiful Tesla, the company driving road decarbonisation, not get a perfect score?
Meanwhile, ESG rating agencies were scoring the reality of a company.
Using data from ValueCo, a French ESG ratings sentiment firm that tracks the evolution of proprietary ESG company ratings by asset managers, the verdict of investor ESG scores of Tesla comes into focus.
According to the asset managers that provided their ESG ratings to ValueCo, Tesla is in the top third on environmental performance (E), in the bottom fifth on governance (G) and in the bottom 5 percent on social issues (S). Its aggregate ESG score is in the top 58th percentile. Read: average. A perfect example of the head in oven, feet in bucket of ice.
ESG ratings may have been an early warning of Elon Musk not always being 100 percent across the relevant subject matter, as a cursory understanding of them would have made it abundantly clear why Tesla was marked down for governance and social issues, particularly around labour rights.
Another criticism sometimes made of ESG ratings is that they are backward-looking. I remember when Volkswagen’s emissions scandal came out the day after they published a press release lauding their inclusion in the Dow Jones Sustainability Index.
But here, for Tesla, ESG ratings already identified governance issues going back to 2021 (and likely earlier, the ValueCo database only goes back to 2021), scoring in the bottom third of companies at the time. They dropped to the bottom fifth by 2023, the year Musk purchased Twitter, but before the debate around his role in the 2024 US presidential elections.
In fact, if there is a critique to be had, it may be that Tesla’s ESG rating is too high! In 2023, around 15 percent of its EBITDA came from selling carbon credits to other car manufacturers. Technically, Tesla is pooling its electric vehicle sales with the petrol and diesel car sales of other manufacturers.
If an ESG rating were to use the RMI-PACTA methodology for this pooled approach, it would suggest that Tesla is not in fact a 100 percent electric vehicle company.
Of course, environment is also not just climate. The environmental pollution of Tesla’s factories has been a notorious issue, including leading to significant local protests in some cases.
Interestingly, the one area where Tesla has been making dramatic improvements is in the battery supply chain.
The NGO coalition Lead the Charge has moved Tesla from a laggard to first place in their 2025 scorecard on its “efforts to eliminate fossil fuels, environmental harms and human rights abuses from their supply chain – from mining to manufacturing”. Incidentally a friendly reminder that sometimes a company is more than the sum of its parts and that the right teams really matter.
It wouldn’t surprise me if bad ESG performance was lurking as one of the drivers for internal change management that led to this improvement.
Of course, ESG ratings are supposed to measure risks rather than impact. And while we know they sometimes mix impact and risks, let us just for a moment consider the environmental risks of Tesla.
Tesla generates a major chunk of its profits from polluting activities (through carbon credits bailing out other manufacturers). Tesla faces significant licence to operate challenges and an increasingly polluted brand.
On governance, one ESG ratings provider scores Tesla high on “business ethics” and “tax transparency”. This for a company that has been the subject of whistleblower allegations for potential violation of securities law and recently seen the Canadian government freeze rebate payments given question marks around accounting practices.
It is worth remembering though that, just because we don’t always agree with ESG ratings, and while combining environmental, social and governance performance in one single score suffers from obvious shortcomings, ESG analysis of companies continues to play a crucial role in understanding financial performance.
So while Tesla as a stock has been one of the best bets of the 2020s, much of the decline in 2025 seem quite obviously linked directly to ESG issues. It would be very convenient to have one of those pesky ESG ratings agencies and internal ESG risk management systems to wrap one’s head around Tesla’s exposures just about now.
Let’s be thankful for just a moment we have them. Like that brief moment where we had empathy for Draco Malfoy. We can go back to bashing them again tomorrow.
Jakob Thomä is co-founder of Theia Finance Labs (formerly Two Degrees Investing Initiative), research director at Inevitable Policy Response and professor in practice at University of London SOAS.
Tesla did not respond to a request for comment.
