May 2, 2022. The S&P 500 ousts Tesla, Inc. from the S&P 500 ESG Index. Tesla is widely recognized as the firm that ushered electric vehicle making into the mainstream. So the index’s move seems unreasonable or possibly made in error to many, raising some interesting questions:

• How does an environmentally-friendly corporation like Tesla get dropped from an ESG index?
• Why does a potentially non-environment-friendly company like Exxon make the ESG index and remain on it?
• What do these moves mean about the integrity and validity of ESG scores and ratings?

Before we go on, let’s bring some context.

Why did the S&P 500 ESG Index drop Tesla?

May 18, 2022. In an S&P blog post, "The (Re)Balancing Act of the S&P 500 ESG Index," a spokesperson announces and explains their decision. Here are the bullet points:

• Global industry group peers pushed Tesla’s S&P DJI ESG Score further down the ranks in the GICS industry group: Automobiles & Components.
• A decline in criteria level scores related to Tesla’s low carbon strategy and codes of business conduct contributed to its 2021 S&P DJI ESG Score.
• A media and stakeholder analysis identified "two separate events centered around claims of racial discrimination and poor working conditions at Tesla’s Fremont factory."
• The analysis also highlights "the handling of the NHTSA investigation after multiple deaths and injuries were linked to its autopilot vehicles, affecting the company’s S&P DJI ESG Score at the criteria level, and its overall score."

Companies, including Tesla, left out of the S&P 500 ESG Index post-rebalance. Image courtesy of Indexology Blog.

The S&P blog post summarizes their case about dropping Tesla, "While Tesla may be playing its part in taking fuel-powered cars off the road, it has fallen behind its peers when examined through a wider ESG lens." And in this statement lies the crux of why the index dropped Tesla and why others are still on.

Analyzing Tesla’s web data

SESAMm’s TextReveal® insights suggest that the S&P 500’s decision to remove Tesla could be justified based on increasing controversy levels concerning discrimination, ethical standards, and work health and safety. By analyzing text related to ESG topics across the web, we picked up trends for the following subtopics:

• climate_change_atmospheric_pollution
• ethical_standards
• discrimination_racism_sexism
• labor_standards
• health_and_safety_at_work
• general_environmental_impact

Tesla’s ESG scores (six subtopics)

Regarding the volume features (Figure 1), we observed a significant increase in the scores related to ethical standards, discrimination, and atmospheric pollution for Tesla before the controversy. The conclusions are mostly the same for ESG sentiment (negative) scores. An interesting note is that the negative score of health and safety at work slightly increased in the months before the removal of Tesla from the index.

Comparing Tesla’s sentiment with other S&P 500 ESG Index companies

To see how Tesla’s ESG sentiment scores compared with other companies, we must rescale them with respect to a large universe of companies. This process means that for a given company, we use percentiles of the distribution of each subtopic’s ESG score to do a rescaling to the S&P 500 ESG constituents list after the 2022 rebalancing. Rescaling allows us to compare the companies with each other because the rescaled score indicates how bad the company is compared to the others, according to a specific ESG subtopic.

The following graphs show different sets of subtopics, plotting the mean of the respective rescaled scores if several topics are considered. Here are the companies considered.

Companies removed from the index:

• Tesla
• Delta Air Lines
• Chevron Corporation

Companies that joined the index after the 2022 rebalancing:

• American International Group
• Expedia Group

Companies still part of the index:

• Exxon Mobil
• Apple
• Amazon

Tesla, Delta, Chevron, AIG, and Expedia compared

Apple, Amazon, and Exxon compared

The S&P 500’s choice is reasonable

Our analysis shows that the S&P 500’s decision to oust Tesla from the ESG index is reasonable. We found significant subtopic volumes and negative sentiment that support the S&P 500’s claims of racial discrimination, poor working conditions, and other controversies.

Thanks for reading this quick analysis. For a more detailed report, including Chevron’s and Delta’s ESG scores, reach out to a representative today.

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Today, environmental, social, and governance (ESG) criteria have become critical in shaping companies' operational and strategic directions. As organizations strive to align with the United Nation’s sustainable development goals (SDG), understanding the variances in ESG performances across different geographical regions becomes crucial. This article explores ESG discrepancies in North America, Latin America, Europe, Australia, Asia Pacific, and Emerging Countries. By dissecting the prevalent ESG risks and illustrating the distribution of SDG adverse behaviors within these regions, we aim to provide a granular analysis that not only highlights regional challenges but also paves the way for tailored strategic frameworks. This nuanced approach facilitates an informed assessment of disparities, empowering stakeholders to craft effective and regionally nuanced strategies.

ESG Overview: A Regional Perspective

Upon standardizing data across the examined regions, our analysis unveiled a predominance of social risks across the board. Yet, the regional specificities unveil the complexity of global ESG landscapes.

Upon standardizing data across the examined regions, our analysis unveiled a predominance of social risks across the board. Yet, the regional specificities unveil the complexity of global ESG landscapes.

Latin America is markedly affected by environmental risks, underscored by legal actions against companies for endangering biodiversity. Legal battles over toxic spills, water contamination, and ecosystem-threatening activities vividly portray this region's environmental challenges.

Europe emerges as a hotbed for governance-related risks, particularly emphasizing influence strategy and communication. European companies find themselves at the correlation of controversies ranging from greenwashing and emissions cheating to governance failures, spotlighting the complex governance terrain they navigate.

While grappling with governance risks, North America and Australia exhibit unique profiles. North American firms face various governance challenges, from securities fraud to greenwashing, painting a complex picture of corporate governance in the region. Australian companies are likewise embroiled in governance concerns, predominantly linked to senior management and regulatory compliance, reflecting the governance trials specific to the Australian context.

Emerging countries highlight the prevalence of social controversies, from human rights violations to labor rights concerns, underlining these regions' social complexities.

This multifaceted overview underscores the broad spectrum of ESG risks while illuminating the distinctive challenges faced by each region.

UNSDG Adverse Behaviors: Regional Breakdown

When looking at UNSDG adverse behaviors for the same regions, we find regional trends and more generalized ones. For example, Goal 1, “End Poverty,” displays one of the highest breach rates of all the goals. Whereas Goal 6 - Clean Water and Sanitation, displays interesting discrepancies, mainly exposing differences between developed and developing countries.

The table below provides a detailed comparison of SDG adverse behaviors across regions, categorizing them by specific goals to highlight regional differences in SDG challenges.

Goal 1, "End Poverty," is the most prevalent SDG issue across all areas. Europe is experiencing the most significant impact due to various factors, including labor rights issues, human capital concerns, governance challenges, anti-competitive practices, and tax controversies.

Similarly, Goal 16, "Peace, Justice, and Strong Institutions," underscores significant issues in North America related to human rights, labor, management integrity, anti-competitive actions, tax strategies, corruption, and shareholder matters, driven largely by flaws in the criminal justice system, including over-incarceration, racial bias, and police misconduct. These problems undermine public trust and equality, highlighting the need for governance improvements despite North America's strong institutional base.

Emerging countries face the greatest challenges with Goals 3 and 11, "Health & Well-being" and "Sustainable Cities," respectively, due to inadequate healthcare infrastructure, disease prevalence, limited healthcare access, poor sanitation, pollution, overcrowding, and substandard urban planning. Addressing these issues requires substantial healthcare, sanitation, and sustainable urban development investments to mitigate risks.

UNGC Controversies: A Regional Analysis

Our exploration extends to aligning ESG controversies with their respective regions and assessing the proportion of these risks aligning with breaches of the United Nations Global Compact (UNGC) principles.

Latin America emerges as the frontrunner in this evaluation, demonstrating a noteworthy prevalence of breaches, particularly within the environmental pillar. Notably, the focal point centers on environmental damages attributed mostly to mining and metals companies.

Australia is marked by a significant number of controversies surrounding human rights violations. These encompass various instances, ranging from privacy breaches and infringements on the right to security and dignity and diversity & inclusion. These incidents have garnered considerable attention, contributing to the heightened significance of regional human rights breaches.

In North America, despite a considerable share of human rights breaches, it distinguishes itself by exhibiting the highest prevalence of labor rights violations. In contrast to other regions, North America faces a substantial number of lawsuits related to employment, particularly concerning diversity and inclusion breaches, including harassment lawsuits and instances of racial bias.

European companies distinguish themselves through notable instances of Anti-corruption pillar breaches, including multiple failures in money laundering investigations, legal actions resulting in lawsuits and fines, as well as settlements for bribery allegations and accusations of kickbacks.

Latin America's environmental controversies, Australia's human rights challenges, North America's labor rights issues, and Europe's anti-corruption breaches each tell a part of the global ESG narrative, demonstrating the diverse facets of regional ESG controversies.

Leveraging SESAMm for Insightful ESG Analysis

SESAMm's technology identifies and analyzes potential risks and controversies through our advanced AI-powered text analysis tool, providing essential insights for stakeholders. This capability is invaluable for organizations, particularly private equity firms and financial institutions, aiming to navigate ESG complexities. By leveraging SESAMm's insights, businesses can adapt their ESG strategies to their regional contexts' unique challenges and opportunities, ensuring global sustainable and responsible operations.

Conclusion

To summarize, this analysis underscores significant regional differences in ESG factors, with social risks emerging as a common concern worldwide. Yet, regional distinctions are evident: Latin America is particularly impacted by environmental issues, Europe grapples with governance risks, and emerging nations face a surge in social controversies. The detailed analysis of SDG adverse behaviors, organized by goals for each region, highlights these differences further. It is imperative for companies to recognize and adapt to these regional nuances in their ESG strategies, ensuring approaches are finely tuned to address the distinct risks and challenges prevalent in their specific operational environments.

SESAMm’s AI Technology Reveals ESG Insights

Discover unparalleled insights into ESG controversies, risks, and opportunities across industries. Learn more about how SESAMm can help you analyze millions of private and public companies using AI-powered text analysis tools.

The world of private equity has been fertile ground for the adoption of alternative data, including AI-driven insights from firms like SESAMm, an expert in Natural Language Processing (NLP).

Could SESAMm’s technology provide Carlyle with the tools to identify a better class of investment opportunity?

When SESAMm’s CEO Sylvain Forté met the man in charge of data at The Carlyle Group, at an industry conference, the opportunity arose to put SESAMm’s data to the test.

“I remember the first day I met Sylvain and he said, I can tell you if your company is trending positively or negatively on the internet,” recounts Matt Anderson, Chief Data Officer of Carlyle, at a recent PE Insights webinar, in which EQT and Apollo were also speaking. Sensing potential in the data, he decided to give it a go.

SESAMm’s NLP platform generates quantitative and qualitative analytics on a wide array of entities – from public and private companies, to brands, products and individuals, by running cutting edge algorithms across billions of web-based articles.

Their data lake is not limited to news stories from the New York Times or Wall Street Journal, but spans a whole variety of global sources – social media, blog posts, professional forums, customer reviews and more, in over 100 languages.

Using this ability to interpret unstructured text from a huge slice of the internet, SESAMm’s team created insights designed to help Matt’s deal teams evaluate target companies.

The challenge was getting investment professionals to buy into the value of alternative data for private companies, so SESAMm condensed everything into easily-digestible reports. They included time-series and charts measuring companies on a variety of key metrics versus their peers, including ESG risk, e-reputation, competitive positioning, sentiment, positive and negative themes and other critical KPIs.

By regularly presenting SESAMm’s analytics reports to investment committees, Sylvain and Matt hoped to gradually convince deal teams that alternative data could have a positive impact on the investment process.

“It was about sharing the data in the form of slides directly with deal teams in a way that was automated on our side but easily consumable as part of the pre-deal decision process”, said Forté.

“We saw the need to convince people and show, time after time, that it really works, that this data is really valuable and can give an edge”, added Forté.

“In some instances it helped us to not make investments or avoid allocating resources to things that were marginal or moving in the wrong direction, and that was really valuable”, said Anderson.

To further prove the value of the data, Matt asked Sylvain to create analytics reports on a selection of Carlyle’s historical target companies. The idea was to see if SESAMm’s scores and analytics were predictive of the deal outcome, whether positive or negative.

“If we put a number on how positive SESAMm feels about some of these deals between one and ten, with one being, ‘avoid at all costs’ , and ten, ‘go for it’, what would it have told us?”, said Anderson.

After running the back test, the results showed a clear correlation between SESAMm’s analysis, and the deals that performed well and those that fell through.

“Looking at the results, I think that people would have really paused an investment committee around some of the conclusions”, commented Anderson.

“Having a view of the themes being surfaced, the plateaus in certain trends, and the sentiment charts heading in a negative direction was eye-opening for our leaders and deal teams – because they had to actually live through those deals. So seeing that kind of data, and what it can help you avoid was really insightful.” Says Anderson.

Ultimately, the integration of SESAMm’s analytics reports into Carlyle’s investment process was so successful that they were rolled out across all global investment teams. The two companies have developed a strong partnership based on the proven value of alternative data in the private equity investment process.

To find out how SESAMm can support your investment decision-making, to request a demo or for any other questions regarding our data do not hesitate to contact info@sesamm.com.