This focus on the output tends to emphasise climate change, while downplaying the other aspects of ESG leading to sometimes contradictory ESG allocations. It also ignores the real benefits of engaging with companies and helping them transition to more sustainable business models. Sustainability should be carefully used as a scalpel to pinpoint specific issues in a company, rather than a hammer to bash entire industries without giving them the opportunity to improve.
We apply this value chain analysis to Tesla and Tyson Foods to understand their sustainability.
How sustainable is Tesla?
Tesla is a darling of the stock market. As of the end of February 2021, it was the seventh most valuable company in the world and worth more than three times the next most valuable carmaker. In recent years, Tesla has featured as a core holding in ESG portfolios given that it’s a leading manufacturer of electric vehicles and clean energy batteries.
Tesla has undoubtably had a positive effect on the auto industry from a climate change point of view. It’s nearly single-handedly made electric vehicles commercially viable and spurred rivals to develop their own EV production lines. But Tesla has arguably become less sustainable over time.
It’s reliance on cobalt, nickel and copper to make rechargeable lithium-ion batteries used to power electric vehicles is a highly polluting activity. Not only is copper and nickel mining among the highest carbon emitting mining activities but cobalt extraction often occurs in jurisdictions with dubious human rights records and widespread corruption. In addition, Tesla is betting big on bitcoin, recently making a US$ 1.5 billion investment into the cryptocurrency, but bitcoin’s energy intensive mining process means it is becoming an increasingly large contributor to global warming.
There is no easy solution to sustainably sourcing the raw materials used in batteries. This makes electric vehicles a prime example of how ESG pros and cons have to be weighed against each other when evaluating the sustainability of companies. While Tesla is embraced by ESG investors for its environmental impact, companies like Norilsk Nickel, which is a key supplier for Tesla’s batteries, are avoided. This is the major problem of simply analysing the high-level operations of a company to judge its sustainability - it is a blunt, inexact tool that doesn’t necessarily provide investors with the soundest information to make sustainable investment decisions.
It also leads to inconsistencies such as energy exploration and production companies (E&P) being excluded from portfolios while internal combustion engine vehicle makers are included despite the latter’s dependence on fossil fuels. A more holistic and balanced approach to sustainability is to look at the entire value chain to make an informed decision about how sustainable a company really is.
Applying sustainability criteria to the entire value chain of a company
In the same way that investors research each step in the value chain to understand the underlying strengths of a company, we can concurrently rate the company’s sustainability by analysing how it sources, produces and distributes its products. This isn’t easy and requires more analytical resources than simply evaluating a company’s final product, but it is necessary for making better investment decisions.
This approach should include how a company sources its materials, uses energy and water in the manufacturing process and its recycling policies, treats employees, upholds shareholders rights and whether it distributes and markets products ethically. Each of these categories can then be further broken down for more detailed analysis. For example, for employee treatment, we can ask whether:
- employees are compensated fairly.
- work conditions are safe and healthy.
- employees are given adequate allowance for work/life balance.
- diversity is valued and promoted.
This systematic and granular approach combined with proprietary work on ESG helps us better rate the overall sustainability of a company. It enables us to understand not only the sustainability of the business at a point in time but also its direction of travel, and pinpoint where it requires improvement. By applying the same rigour used to find investment ideas to sustainability, we can then engage more effectively with a company.
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