In one of the most widely anticipated additions in decades, Tesla (NASDAQ: TSLA) recently joined the S&P 500, meaning Elon Musk’s company is joining an array of exchange traded funds where it previously didn’t reside.

However, it’s not a foregone conclusion Tesla will join the S&P 500 ESG Index, which is tracked by the SPDR S&P 500 ESG ETF (EFIV) and the Xtrackers S&P 500 ESG ETF (SNPE).

The index is a broad-based, market capitalization weighted index that provides exposure to companies with high environmental, social, and governance (“ESG”) performance relative to their sector peers while maintaining similar overall industry group weights as the S&P 500 Index.

“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.”

Sizing Up TSLA Entry Into EFIV, SNPE

Perhaps surprisingly, Tesla’s CSA score isn’t great and that could keep it from joining EFIV and SNPE over the near-term.

“For this current assessment year, Tesla’s S&P DJI ESG Score was 22 out of 100, up 8 points from 2019’s score,” notes S&P Dow Jones. “This is driven by its ESG Dimension Scores, including an Environmental score of 28 (up 1 point from last year), a Social score of 6 (up 2 points), and a Governance score of 49 (up 21 points). Tesla does not fill out the CSA, so its S&P DJI ESG Score is determined based on research using publicly available information.”

Environmental, social, and governance (ESG) investing continues to show its mettle despite a challenging marketplace. ETF investors looking to further fortify their portfolios with ESG can look at funds like EFIV and SNPE.

It’ll be a few months before the two ETFs can even consider the inclusion of Tesla.

“So, what does this mean for Tesla’s standing in the S&P 500 ESG Index? 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. As mentioned earlier, however, the biggest determinant of the composition of the S&P 500 ESG Index is a company’s S&P DJI ESG Score. But it’s not just a company’s absolute performance that matters; a company also needs to rate well relative to its peers,” according to S&P Dow Jones.

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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.