What Elon Musk gets right about ESG—and what he gets very, very wrong

Last week, Musk railed on Twitter against ESG (“Environmental, Social, and Governance”: non-financial factors increasingly being considered by socially conscious investors) for Tesla being dropped from the popular S&P Global ESG index—while ExxonMobil remained. On its surface, understandable how many would be confused by that turn of events, including the increasingly un-nuanced billionaire troll.

ESG is not perfect. In popular conversation and in media, it is often used as a synonym for “sustainability,” leaving out the other, sometimes harder to define parts of the model. (What factors should be considered “social” for example is often hotly debated.)

And as this event shows, the approach often focuses less on whether a company’s core business is good for society, and more on its managers’ intentions and goal-setting. Exxon is a darling of ESG now after the infamous board defeat last year by Engine No. 1, a socially-conscious investment firm, steered its management to be more aggressive about its climate goals. Meanwhile, Musk has not taken seriously allegations of poor working conditions at Tesla.

There is a reckoning coming to the ESG approach to investing, one that I hope will sharpen ESG’s definitions and direction. The SEC has already signaled it is looking to standardize climate impact reporting, but other types of impacts will have to become better defined as well—and more coordinated with company efforts toward DEI, labor relations, and other work streams. This won’t be an easy task—it will constantly run into predictable political debates and a lack of shared philosophy and understanding around social goals.

What last week’s news shows is that goal setting and reporting won’t be enough: there needs to be a serious consideration of the positive and negative impacts of a company’s products on society as well.

But just because something isn’t perfect doesn’t mean it’s not worth pursuing. We have long needed a standardized way to allow the financial engines of our economy to reward companies for making socially-conscious decisions. Now that Wall Street is coalescing around ESG, we have to make it better—not complain that it’s not yet perfect.