Tesla: When ESG Narratives Fail – Seeking Alpha
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Due to being the leading electric vehicle manufacturer in the world, Tesla (NASDAQ:TSLA) is widely seen as a great stock from an ESG perspective. But its actual climate impact is far from great, as shown by a range of studies. This also holds true for its products to some degree, as EVs aren’t as clean as some want to believe. I think that this could hurt the stock eventually once electric vehicles become more commoditized, as Tesla might end up being just one of many EV players. Multiple compression could hurt the stock in that case. Combined with a range of other headwinds, such as China lockdowns and supply chain issues and rising interest rates, Tesla seems like a risky investment at current prices.
Electric vehicles do not generate any emissions locally while being used, but that does not mean that they are clean per se. Instead, they cause emissions elsewhere. This holds true for the manufacturing process and the production of the materials needed to build an EV, and it also holds true for the generation of electricity. In most countries, a large portion of electricity is still being generated by burning coal or natural gas, which causes emissions of CO2, particulate matter, and so on.
The production of a single EV battery weighing just 500kg causes more CO2 emissions than producing a complete ICE-powered vehicle, according to this study. EVs thus come with a huge upfront emissions load, and they have to be driven for tens of thousands of miles before “breaking even” compared to the emissions caused by ICE-powered vehicles. If they are used long enough, they eventually have a favorable CO2 footprint compared to ICE vehicles, but that does not at all mean that EVs are environmentally friendly or that they do not come with environmental burdens. According to this MIT research, EVs still cause CO2 emissions of 200g per mile, versus CO2 emissions of 275g per mile for hybrid vehicles — that is less than the emissions caused by ICE-powered vehicles, but still a quite meaningful amount. Many people seem to believe that emissions savings are larger than they are — but EVs still cause considerable pollution.
When we look at the large amounts of lithium, copper, cobalt, and so on needed to manufacture an EV, there are additional environmental concerns to consider. All in all, from a purely environmental perspective, it is very clear that not owning/using a personal vehicle at all is way better for the environment than switching from an ICE vehicle to an EV.
This doesn’t mean that EVs won’t continue to capture market share in the coming years, they most certainly will do so. But as more and more people realize that switching to EVs does not mean that emissions drop to zero, they might eventually be seen as less of an environmentally friendly technology. Instead, they might be seen as a major polluter that is a little better than the ICE alternative, but that is far from great. That could hurt story stocks in the EV space, where ESG is an important narrative. In Tesla’s case, there are additional reasons to question the investment from an ESG perspective.
Corporate accountability non-profit As You Sow has recently released a report that looked at 55 of the largest tech and non-tech companies in the world and at the efforts of these companies to fight climate change. Tesla was among the companies that were studied, and it received an extraordinarily bad mark:
As You Sow report
Tesla ranked dead last in the study, with a score of zero, equal to Berkshire Hathaway (BRK.A)(BRK.B). Tech companies such as Microsoft (MSFT), Alphabet (GOOG)(GOOGL), and Apple (AAPL) were among the top rated companies, which isn’t surprising. After all, they do quite a lot to combat emissions — Alphabet, for example, aims to become carbon neutral by 2030, which is way more ambitious than most countries around the world.
Somewhat surprisingly, even oil companies such as Exxon Mobil (XOM) and Chevron (CVX) scored better than Tesla. Even though the oil and gas they produce is responsible for CO2 emissions when end users burn it for heating, electricity, etc., these companies do try to lower their emissions over time. This includes efforts to reduce flaring, becoming more efficient, but also CO2 storage projects and so on. Most companies in this list are offering voluminous disclosures about the emissions they cause either directly or indirectly. But Tesla is not scoring well in that regard at all, as it is not offering meaningful disclosures about the emissions it causes either directly or indirectly, e.g. by buying commodities from mining companies that pollute the air. One can argue whether As You Sow’s methodology is the best, but it seems to be pretty clear that Tesla is not communicating very clearly about its emissions. Being an EV company alone isn’t enough in that regard, proven by the fact that many other global players are more engaged about reducing emissions and about communicating clearly to investors, customers, and employees about what the company is doing.
Now ESG investing isn’t an approach everyone has to share of course, but that angle is highly important for a company like Tesla. Tesla, with around 1% of global auto production is valued at roughly the same market cap as all its competitors combined, and that is due to its image as a “clean” company to a large degree. Many Tesla investors do own shares in the company due to Tesla’s stated goal of combatting CO2 emissions and offering cleaner transportation. But when the company is not following through with vast efforts to improve, and if it is lacking great scores in studies such as the one above, then that image could change over time. More and more auto companies are entering the EV space, and industry-wide EV sales are growing at a faster rate than Tesla’s sales. Over time, Tesla will thus likely change from the EV company to one of many EV companies. As EVs get more commoditized and as their nimbus wanes, ESG-driven investors could become more critical of Tesla’s actual performance when it comes to being open about emissions and when it comes to combatting its own emissions. Tesla being the first major EV company may not cut it any longer from an ESG perspective, especially since other companies that are also growing fast (e.g. GOOG, MSFT) are clearly performing better when it comes to these ESG metrics.
Apart from these (potential) ESG headwinds for highly expensive Tesla, there are other things that could be a problem for the company. First, China’s harsh COVID crackdowns naturally hurt Tesla’s production in the country that is all-important for Tesla’s operations. This does not only rely to direct impacts from lockdowns on Tesla’s plants, but Tesla will likely also feel impacts from its suppliers being locked down. Supply-chain disruptions could cause Tesla to underperform versus production expectations, which could lead to downward estimate revisions and potential downgrades from analysts in the coming months.
Tesla also is impacted by very elevated commodity price inflation. Copper, lithium, and so on have all become way more expensive in the recent past, which leads to higher input costs for Tesla. Tesla’s margins have been healthy in the past, but with rising commodity prices, they might come under pressure going forward. Tesla’s strategy of raising prices for its EVs will likely not work endlessly, especially as consumers might be more inclined to spend less on new vehicles as the economy could enter a recession in 2023, as predicted by a range of investment banks. A (potential) economic slowdown, combined with rising commodity prices and supply chain issues, could spell trouble for Tesla’s profitability this year. That naturally is more meaningful for a company that is priced for perfection, which holds true for Tesla:
The company is trading at a higher 2023 EV/sales multiple than other major EV pureplays, including NIO (NIO), XPeng (XPEV), Lucid (LCID), Rivian (RIVN). Legacy automobile companies such as Ford (F) are even cheaper, despite Ford’s ambitious EV plans and attractive F-150 Lightning that has easily beaten the Cybertruck to market.
With Tesla trading at a premium to all of these companies, even the other EV pureplays, it could be vulnerable. We have seen in recent weeks that even strong mega-caps such as Alphabet or Amazon (AMZN) can experience steep selloffs based on weak quarterly results, announcing forward guidance below expectations, and so on. Tesla, being way more expensive than these companies and facing the above-mentioned headwinds, could be vulnerable in this environment.
Last but not least, rising interest rates also are an issue for Tesla. Rising interest rates result in higher discount rates, which hits expensive growth companies harder than value names where growth is less pronounced. With the Fed likely raising rates several more times this year, growth names including Tesla could face serious macro challenges. Financing a new vehicle also becomes more costly when interest rates rise, which is why consumers might cut back on expensive vehicle purchases in the coming years. This would hurt Tesla and those of its peers that sell pricy vehicles.
Among many investors, Tesla has a clean image from an environmental perspective. But since EVs actually aren’t that clean after all, and since Tesla is not doing as much as many other large companies when it comes to emission disclosures and emission reduction efforts, its image could change over time.
Since Tesla is quite expensive even for an EV company, and since it faces multiple additional headwinds on top of these ESG concerns (that should be highly relevant for Tesla’s investors, compared to investors in some other industries), I do believe that avoiding Tesla could be the right decision. The fact that its CEO will possibly have less time to guide Tesla due to being involved with Twitter (TWTR) is another issue Tesla owners should keep an eye on.
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Disclosure: I/we have a beneficial long position in the shares of AMZN, GOOG, MSFT, BRK.B, NIO either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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May 12, 2022 at 02:28PM