I’ve been chatting with a financial planner recently, trying to figure out ways to best leverage my funds for a long and happy life. I’m finding that landing on acceptable Environmental, Social, and Governance (ESG) managed investments is difficult, as many funds include holdings like Facebook and Disney, which I oppose on social justice grounds. Then last week CEO Elon Musk announced during the annual shareholder meeting Tesla’s move to Texas. No longer would the all-electric car company call the Golden State home for its headquarters. Musk made the announcement at the company’s annual meeting, which was held for the first time at its manufacturing plant under construction in the Texas capital. (Disclaimer: I own Tesla stock.)
Texas, really? Texas is the state that bans state investments in businesses that cut ties with the oil and gas industry. It forces the state’s pension funds to divest from companies that exclude fossil fuel companies. A Texas Republican actually lobbied to the Securities and Exchange Commission (SEC), US President Joe Biden, and Congress to issue rules regulating sustainability-focused investments so they don’t discriminate against oil and gas producers.
And there are so many other distasteful at best and alarming at worst non-ESG practices in Texas. Ick.
How will Tesla’s move affect its reputation and status among ESG investors? What is the breaking point? Soon we will say, “Enough, already, Mr. Musk. You have the wherewithal to be better, to be great! And we want you to step up.”
Deep in the Heart of Texas
“What you northerners never appreciate … is that Texas is so big that you can live your life within its limits and never give a damn about what anyone in Boston or San Francisco thinks.“
Maybe we all should’ve known that Tesla’s move to Austin, Texas, from Palo Alto, California, was coming.
- After all, as CNBC reminds us, in April 2020, on a Tesla earnings call, Musk lashed out at California government officials, calling their temporary Covid-related health orders “fascist” in an expletive-laced rant.
- As the New York Times concedes, Musk and the state’s conservative lawmakers share libertarian sensibilities.
- In 2020, Musk personally relocated to the Austin area from Los Angeles where he had lived for 2 decades. He’s said he’s mostly been living in a tiny home near the Boca Chica testing site of his aerospace company SpaceX.
- Texas Monthly reported in August that Tesla had filed paperwork to begin selling electricity in Texas.
The high cost of housing in California was said to be a major factor behind the decision for Tesla’s move. “It’s tough for people to afford houses (in the San Francisco Bay Area) and lots of people have to come from far away to get to work at the company’s factory and offices,” Musk said. “There’s limits on how big you can scale in the Bay Area.”
Then again, home prices in Austin have risen more than 45% over the past year, according to a report released in August by the National Association of Realtors. Housing affordability has fallen in areas like Austin as a result of this increased demand, and now the area needs more housing, sorting out the supply-chains, and adding skilled labor to the construction sector, according to MarketWatch.
The primary office of any company doesn’t have to be located near its production facilities; indeed, there are many other criteria to consider when siting a major corporate headquarters, particularly ESG criteria.
Tesla’s Move to Texas will Definitely Have Many Ripple Effects
“Texans ain’t Texans if they aren’t willing to boast about the state they call home.“
As climate action and risk become increasingly central to public policy-making and corporate strategy, institutional investors are also increasing their focus on environmental governance practices, management systems, and investment criteria. When we invest, we want a strong financial performance as well as to make contributions that advance ESG practices. By incorporating ESG criteria into investment analysis and portfolio construction, investors can identify more responsible companies for potential investment and improve the sustainability performance of their current investments.
Owning shares in a company gives investors a channel through which to raise ESG issues of concern. Active shareholders can bring important issues to the attention of company management, often winning media attention, educating the public, and influencing positive changes in the way business is conducted.
Tesla is a disruptive force that is in the process of changing the way the entire world engages in energy consumption as a means to save the Earth. That’s why Tesla’s move to Texas seems so contradictory.
Tesla wants a zero emissions future. Where Musk and the Texas legislators differ tremendously is on climate change and renewable energy. Tesla’s stated mission is to “accelerate the world’s transition to sustainable energy,” and the company has made good on the goal of creating an affordable all-electric automobile for the masses. Capacity “is the fundamental, I think, way to think of the value of Tesla,” Musk said. “And so, if we are able to accelerate sustainable energy 5 more years, that is good. Hence the need to grow quickly.” But to Texas?
Texas state leaders are motivated by fossil fuels. “Oil and gas is the lifeblood of the Texas economy,” state Rep. Phil King said on the House floor in May. Texas leaders are aggressively protective of the state’s large petrochemical industry. In a letter to state regulators in July, Governor Abbott directed the Public Utility Commission to incentivize the state’s energy market “to foster development and maintenance of adequate and reliable sources of power, like natural gas, coal and nuclear power.”
Renewable energy is at the core of the Tesla vision. The Tesla Powerwall, which can be used by homeowners and businesses to store renewable energy for use when the sun has gone down, when electricity rates are higher, or during blackouts, may become a powerful resource for Texas. By aggregating the solar generating capacity and the storage capacity of Tesla Energy Plan households, Tesla can create a virtual power plant. The Tesla Powerwall retail utility offering is appearing first in Germany and Texas, the sites of the 2 newest Gigafactories. Musk spoke this week about using Tesla batteries to stabilize grids and creating “a sustainable energy future.”
Texas leaders like to place blame on renewable energy. In February, 2021, a blizzard hovered over Texas, causing its electric grid to collapse. In an area that is entirely unaccustomed to bitter cold, millions of people found themselves without electricity and heat for days. In response, some of the state’s leaders, including the governor, pointed to renewable energy as the cause for the outages. Data indicated, though, that 70% of “outaged” megawatts were natural gas plants. To prevent wind turbine blades from freezing, they must be at least partially winter-proofed — by hardening the control systems, using the right fluids, and de-icing the blades. However, the people who had the choice to do so or not chose not to do so with the Texas wind turbines that did shut down.
Oddly, Texas has no clean energy mandates, but has become a national leader in the use of solar and wind power — driven largely by the low cost of renewable energy. The state produces more wind energy than any other. Earlier this year a research team at Texas A&M University took a look at the high-impact potential for rooftop solar arrays. They reported that rooftop solar represents “a technically, economically, and environmentally feasible solution for electricity generation and could play a significant role in the future energy mix of Texas.”
Tesla’s model provides direct sales to customers, which Texas doesn’t allow. When automakers like Tesla sell directly to consumers, they offer fair pricing for all, increased competition, and more jobs. Direct sales make EVs more affordable and make the experience of buying a car less arduous for buyers. Currently, only 22 states allow for all vehicle manufacturers to sell vehicles to customers. Another 11 states allow for only one manufacturer, Tesla, to sell vehicles, often in a limited number of locations throughout the state. Tesla has showrooms in Texas, but employees are not allowed to discuss prices with prospective buyers, and the showrooms cannot accept orders. Texans can buy Teslas online and pick the vehicles up at service centers in the state, though.
Texas law sides with car dealerships. Tesla will be prohibited from selling vehicles directly to customers in Texas because of a protective law that requires car dealerships to be intermediaries between manufacturers and customers. Of course, EVs don’t need the oil changes, transmission repairs, and other services that ICE vehicles need and which can amount to 50% of dealers’ gross profits. Once the Austin factory starts producing vehicles, including a new pickup truck Tesla calls Cybertruck, those vehicles will have to leave the state before they can be delivered to customers in Texas.
Tax breaks. California granted Tesla hundreds of millions of dollars in tax breaks, something that Governor Gavin Newsom noted on Friday. “I’ve known Elon 20 years, I’ve appreciated the investments he’s made, his innovative spirit … what an extraordinary talent,” Newsom said Friday, as reported by San Francisco’s KRON4. Newsom went on to note California’s regulatory environment and tax breaks helped Tesla to grow, and the state is a leader in electric vehicle manufacturing.
Texas has long used its relatively low taxes, which are less than California’s for corporations, to attract companies. County officials have already approved tax breaks for the company’s new factory, and the state might offer more. But because Tesla will continue to have operations in California, it may still have to pay income tax on its sales in the state, said Kayla Kitson, a policy analyst at the California Budget & Policy Center.
We Want More from Tesla
“One day, it just dawned on me that I’m from Texas, and that’s what I am.”
A Reuters article argued last week that Tesla’s move to Texas further mars Musk’s ESG credentials, “giving investors increasingly focused on such matters even more reasons to think twice.” Bloomberg Green adds that the surge of money flowing into clean-energy stocks may be increasing the risks posed to investors in the sector.
Several pressing issues should be making ESG investors generally and Tesla stockholders specifically wary.
The Tesla Board of Directors. Given the growing direct and indirect financial impacts of climate change, boards of directors have a duty to adopt a climate action strategy to tackle an existential threat to human civilization and the global ecosystem. At no other time have audit committees been so essential to guide climate governance. How much is the Tesla board really guiding CEO Musk?
A woman’s right to choose. A Texas law bans abortions at about six weeks of pregnancy, when many women don’t know they’re pregnant, and leaves enforcement to private citizens. The new law has already led many women to travel out of state for the procedure. A recent survey of RBC Wealth Management clients found that female investors are almost twice as likely as their male counterparts to say it is important that the companies they invest in integrate ESG factors into their policies and decisions. By moving its headquarters to Texas, Tesla is tacitly supporting this terrible Texas law.
Step back and examine privilege. Tesla has faced criticism over its worker treatment, including losing a racism lawsuit last week. As NPR reported, a federal jury in San Francisco has ordered Tesla to pay a former Black contractor $137 million over claims that he was subjected to racial discrimination at work. A statement issued by Tesla after the award is problematic, too: “While they all agreed that the use of the n-word was not appropriate in the workplace, they also agreed that most of the time they thought the language was used in a ‘friendly’ manner and usually by African-American colleagues.” Oppression is never “friendly,” nor does relegating derogatory language to underrepresented groups remove Tesla’s responsibility.
Final Thoughts about Tesla’s Move & ESG Investing
“Texas has yet to learn submission to any oppression, come from what source it may.”
Nothing in human life is black and white. Changes have left “the purest of (ESG) investors between a rock and a hard place,” said Patrick Wood Uribe, chief executive officer of Util. The London-based firm uses machine-learning models to pinpoint companies that are positively and negatively impacted by the United Nations’s 17 Sustainable Development Goals. “Index providers have had no choice but to mitigate concentrations risks by sacrificing some of the theme’s purity.”
And Tesla continues to produce amazing results. In addition to referencing Tesla’s move to Texas, Musk also used the October meeting to update shareholders on Tesla’s operations. He praised the company’s record vehicle deliveries, which exceeded 240,000 in the third quarter despite supply chain challenges — particularly chip shortages — that have hindered the automotive sector this year. Tesla’s Model Y vehicle, he added, should become the “best-selling vehicle of any kind globally” by number of units sold by 2023, so long as the company’s gigafactories in Texas and Berlin ramp up production as scheduled.
As of May 1, 2021, Tesla officially became a constituent of the S&P 500 ESG Index; Tesla was ranked fifth out of 5 companies in the Automobiles & Components industry group. Tesla’s size, more than its sustainability performance, was the main driver in its inclusion. We who respect companies for their ESG ratings hope that the company’s ESG score continues to increase and the decisions that the company makes benefit multiple dimensions of sustainable life.