It Might Be Awhile Before Tesla Finds Its Way Into This Pair of ESG ETFs

With the obvious being its electric vehicle businesses and solar and smart grid operations, Tesla Inc TSLA appears to be the epitome of an environmentally friendly company, one that checks all sorts of sustainable investing boxes.

What Happened: That and the much-ballyhooed stock just entered the S&P 500 on Monday in the biggest inclusion into the benchmark domestic equity gauge on record. That means Tesla is now a top 10 holding – number seven to be precise – in popular exchange-traded funds such as the SPDR S&P 500 ETF SPY and the Vanguard S&P 500 ETF VOO.

Already a prominent part of a slew of ETFs, Tesla's S&P 500 entry means the stock also entered offshoot indexes, such as the S&P 500 Growth Index and the S&P 500 Consumer Discretionary Index, putting it into ETFs that track those benchmarks.

Why It's Important: Put all that together and it would be logical to assume that Tesla is heading into the S&P 500 ESG Index, but not so fast.

The Xtrackers S&P 500 ESG ETF SNPE and the SPDR S&P 500 ESG ETF EFIV are the ETFs following that index, but Tesla won't be flying into those funds tomorrow or anytime soon for that matter.

“The main driver of whether a company is selected to join the S&P 500 ESG Index is its S&P DJI ESG Score,” according to S&P Dow Jones Indices. “This score is derived from the annual Corporate Sustainability Assessment (CSA), which is administered by SAM, a part of S&P Global. The CSA is a highly granular, industry-specific questionnaire based on financial material ESG metrics. Insights gathered from the CSA form the backbone of the ESG score that is used to select companies added to the S&P 500 ESG Index.”

This year, Tesla's CSA score is 22, up from 14 last year. While that's a solid improvement, it's not good enough to get into EFIV and SNPE right now.

What's Next: Hope isn't lost for Tesla entering EFIV and SNPE, which about $485 million in combined assets under management.

“We won’t know until the upcoming annual rebalance is finalized on the last business day of April 2021. At that time, Tesla will be measured against its peers across many ESG criteria,” according to S&P Dow Jones.

Bottom line: Just because a company makes electric vehicles and resides in the S&P 500 doesn't make it a shoo-in for membership in some ESG indexes.

Disclsoure: The author owns shares of VOO.