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Commentary

Take Five: Of Musk and Materiality

A selection of this week’s major stories impacting ESG investors, in five easy pieces.

Tesla’s CEO continues to be a walking example of why ESG risks to investors cannot be boiled down to a single score.

Of Musk and materiality  – Investors have often wondered whether to view Tesla as a carmaker or a tech company. The verdict is still undecided, after a week which saw the electric vehicle manufacturer post record results, while its CEO gave testimony in a California courthouse. Elon Musk, both an ESG enigma and sceptic, is being sued for securities fraud by investors and the US SEC over tweeted plans to take Tesla private, which never materialised. While Musk maintains funding had been secured, making the claim legitimate, the judge has ruled otherwise, leaving the jury to decide the materiality of Musk’s tweets to the investment process. This is a hard call, further complicated by Musk’s subsequent acquisition of Twitter, which he tried to back out of, having also floated the idea on the social media platform, even though finance this time was not a problem. Musk may not be convicted of securities fraud, having developed a habit of getting away with ignoring rules, along with a following among investors that lets him raise money at will. But will it last? Musk took time out from the trial to tell Tesla investors about strong demand and high orders, partly in response to recent price cuts (which let new customers benefit from federal tax credits), after Tesla reported a 37% increase in quarterly revenue to US$24.3 billion. The firm expects to ride out “short-term uncertainty”, distancing itself from the “contraction” faced by the rest of the industry. Tech or car firm? Certainly Tesla’s travails are a world away from the setbacks of legacy auto manufacturers in the UK and Europe, even though policy, battery and infrastructure issues impact all. But no longer is Tesla the US$1 trillion wonder, with its valuation halved from 2021 highs by a combination of Musk’s Twitter adventures, macro-economic uncertainties and tech sector sell-off. Most of those tech ‘peers’ have suffered more than Tesla in terms of job and revenue losses, but Musk Inc is still on trend when it comes to concerns raised in shareholder resolutions. Even so, Musk represents more of a governance risk than most bosses, in the car, tech or any other sector. “The last thing serious investors want is to see their CEO in a witness stand,” as one analyst noted this week.

Crypto over climate – MEPs gave the impression they consider crypto-assets a bigger risk to financial stability than the climate crisis this week, when approving a law to implement Basel III capital rules. The European Parliament’s Economic and Monetary Committee voted to require banks to fully cover crypto-asset holdings, via a 1250% credit risk weighting, but declined to impose the same restrictions on new fossil fuel exposures, despite the entreaties of multiple NGOs. MEPs can force a plenary vote, but opportunities to refocus supervision on the biggest threats to the financial system are running out.

Levelling up – Investment in clean energy topped US$1 trillion for the first time in 2022, according to BloombergNEF, and is now on level terms with fossil fuel finance flows at US$1.1 trillion per annum. A year-on-year leap of US$250 billion was largely directed at renewable energy (financing 350 GW of solar and wind assets) and electrified transport, but investment in carbon capture and hydrogen both roughly tripled. US$1 trillion per annum is way less than the amount required, but with Europe’s Net Zero Industry Act following in the wake of the US Inflation Reduction Act and a series of Just Energy Transition Plans last year, momentum may soon be unstoppable.

Shades of greenPolitical headwinds may have contributed to a contraction in the US, but pretty much the rest of the world saw strong inflows into sustainable funds in Q4 2022, according to Morningstar. In Europe, the lion’s share went to SFDR Article 8 funds, as the Article 9 market continues to shrink and asset managers struggle to come to terms with ESMA’s proposed rule on fund names. With the UK Financial Conduct Authority’s own consultation on green fund labels coming to a close – eliciting calls for greater voting transparency from fund managers – identifying and quantifying sustainable investments might become harder before it gets easier.

Blueprint for nature – The UK government finally confirmed its plans for post-Brexit payments to farmers for increasing the protection of nature, an issue increasing in political importance in the wake of agreement on the Global Biodiversity Framework. The plans was cautiously welcomed, but the need for urgent action was further underlined by updates from the Environment Agency on the current state of the UK environment, across soil, urban areas, coasts among others. Greater clarity on policy can only encourage further investment in the solutions that are driving change in the food system.

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