From an ESG Perspective, Who Decides If a Company Is “Good?”

Values-Aligned Investing
August 9, 2022

Tesla CEO Elon Musk recently criticized S&P for removing his company from its ESG indexes, tweeting that “ESG is a scam” and that S&P Global Ratings has “lost their integrity.”1 Did S&P err, or was the removal warranted? Is Tesla a “good” company or a “bad” company from an ESG perspective? As with many issues, good or bad is in the eye of the beholder. An investor who is passionate about transitioning the global economy away from fossil fuels toward a greener, more sustainable economy might view Tesla as a “good” company playing a key role in this transition and an appropriate portfolio holding. After all, 99.99%2 of the company’s revenues come from providing sustainable impact solutions—one of the highest levels of revenue tied to sustainable impact themes for any publicly traded company. However, an investor focused on companies with good corporate governance practices, strong diversity, equity, and inclusion (DEI) programs, or superior environmental practices might define Tesla as a “bad” company, as it scores quite poorly across all of these ESG themes (see Figure 1 below).

But Tesla is not alone. If we examine companies in the S&P 500® Index based on their environment, DEI, and governance scores,3 we find that few companies score well across multiple ESG themes. The figure below lists the median Aperio Social Scores4 by theme for the S&P 500 Index, along with the highest scoring (or “best”) companies based only on environmental scores, only on DEI scores, and only governance scores. Aperio’s scores range from 0‒100, with higher scores reflecting companies that have better ESG characteristics relative to their peers.

Figure 1: Sample Aperio Social Scores: Tesla, median S&P 500 scores, and best scoring company by theme as of July 2022.

Xylem, the company with the highest environmental score in the S&P 500 Index, is unusual in that it also has a rather high governance score and a higher-than-average DEI score. Out of the entire S&P 500 Index though, no company scores above 75 across all three ESG themes, and only 20 companies score higher than 75 across two of these themes as of July 2022.

If we were to look at each ESG theme in isolation (Figure 2 – note this “figure” consists of the 3 graphs below) it is readily apparent that the company scores are not evenly distributed, and distributions vary widely based on the specific ESG themes companies are being assessed on. For example, only 13 companies with an aggregate index weight of 2.3% have an environment score ≥75. Companies score better on DEI issues, with 117 companies, or 34.3% of the index by weight, scoring ≥75, and the entire distribution being shifted more toward higher scores. As far as corporate governance goes, only 67 companies—with an aggregate index weight of 7.0%—score ≥ 75.



Figure 2: Distributions of Aperio Social Scores by ESG theme for S&P 500 Index companies as of July 2022.


Investor portfolios can look quite different based on what types of ESG data and themes each investor chooses to emphasize. Was S&P correct in dropping Tesla from its ESG indexes? Is Musk justified in being upset, arguing that if Tesla isn’t “good,” ESG is meaningless? Each investor must make that determination for themself, for as Shakespeare writes in Hamlet, “there is nothing either good or bad but thinking makes it so.”

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Important notes:

Aperio Social Scores

Aperio assembles data from ESG data vendors and other organizations annually.  This data is used to score companies on a wide range of ESG topics and is the basis for creating values-aligned portfolios. Data elements are combined into pre-configured, standard Aperio Strategy and Tilt options and are also used to create customized, client-specific scoring profiles). The output from these profiles is generally referred to as “Social Scores” or “ESG Scores.” The data used to compile these scores are described in an “ESG Data Dictionary” that outlines the data elements or factors we use. Aperio updates the Data Dictionary as additional data come into use or additional components and options are developed using existing elements.

To calculate Aperio Social Scores, data elements are evaluated (and quantified if needed), z-scored (statistically compared to the average value of other companies) and combined based on assigned weights into issue area Component Scores. Companies have multiple scores, with a different score for each component. Component Scores are aggregated at profile-assigned weights and are used to calculate Company Social Scores. Company scores are calculated across the entire Aperio universe and range from 0 to 100. Higher company social scores reflect a “better” company and lower scores represent a “worse” company based on the criteria being evaluated.  When used as a tilt in the construction of portfolios, higher scores can result in an overweighting of companies and lower scores can result in an underweighting of companies.  Strategy scores consist of the weighted average of the relevant component scores for each company. Each strategy—whether standard strategy option or client-specific—generates a different set of company scores. These strategy specific scores are usually referred to by their strategy name, such as “DEI Score,” “Aperio SRI Score,” etc.

The portfolio construction process targets a well-diversified portfolio that minimizes the forecast tracking error, which is a measure of the expected sensitivity of the portfolio to changes in the benchmark, relative to the selected benchmark index, while also considering company social scores and values-aligned investing objectives. The forecast tracking error calculation is based on portfolio holdings, benchmark holdings, and a risk model (which takes into account the volatility and correlation of the risk factors in the marketplace) as of a specific date. For different dates, the portfolio and benchmark holdings, and the risk model will differ. Therefore, the measure on one date could significantly differ from a measure on another date.

We are happy to provide further details on how Aperio Social Scores are compiled and used.

Sources of Research

Aperio sources of data include MSCI ESG Research, ISS ESG, Bloomberg, other data providers as relevant, and industry classifications (usually GICS classifications). In addition, for certain Data Elements, Aperio sources information from other sources, including advocacy organizations. Aperio always identifies these organizations and encourages investors to consider the objectives of the organization when deciding to use criteria based on these data. 

Each of these data sources relies on a number of original sources for its data gathering.  Three primary sources for data gathering are:

Mandatory Company Disclosures: In certain cases, companies must comply with regulatory requirements for the disclosure of information. This kind of information can range from financial information to information the US Environmental Protection Agency requires company facilities to disclose. The advantage of this information is that it is comprehensive across the universe of companies. Unfortunately, in many issue areas, no mandatory disclosure applies.

Voluntary Company Disclosures: Much of the information available is voluntarily disclosed by companies, often in corporate sustainability reports or in sustainability or responsibility sections of their websites. This information can be more difficult to incorporate into evaluations and ratings because all companies do not disclose all information and even when disclosed, companies are not consistent in how they disclose similar issues.

Third-party Information: In certain instances, third parties may have information about a company that does not rely on the information disclosed by the company.  For instance, a regulatory agency that fines a company has that information independent of any disclosures by the company.

Data that Aperio receives from its vendors and other information sources may include metrics constructed as a combination of these concepts.  For instance, there is mandatory disclosure of certain kinds of international operations, including registered subsidiaries. When this information is combined with evaluations of countries’ political and civil liberties provided by a nongovernmental organization (NGO), we have a hybrid Data Element. In another example, we use ratings by the Human Rights Campaign (HRC) as an indication of a company’s approach to sexual-orientation issues. HRC gathers information from companies, including by conducting surveys (voluntary disclosure), and then scores the companies. So, this is a combination of voluntary disclosure and evaluation.

NOTE: When assembling data into Aperio scores, Aperio determines how to score missing data based on the reason and context for the missing data element value.  When the data element is based on voluntary disclosure and the data vendor sought to gather the data element from the company, but the element is null, the company will receive the lowest available score.  When the data element was not researched by the vendor because it is not relevant to the company’s industry, and Aperio agrees it is not relevant, then the company is assigned the highest possible score.  When the vendor did not research the data element for the company based on it not being relevant, but Aperio disagrees with this assessment, the company is assigned an average score for the sector.

Data Frequency, Updates & Limitations

Aperio updates its ESG data for the SRI/ESG Menu annually. Data Elements may be updated during the year as our data providers receive new data from either the company or publicly available sources, and this will not be captured in our processes until Aperio’s next annual data update. Aperio updates all exclusions and scoring profiles annually, usually during the first calendar quarter. As accounts are rebalanced, the updated data will be incorporated, usually during the second calendar quarter.

Because the data sets are not updated in real time, there may be a lag between a change at the company and when the change flows into the data set, and again when it flows into the portfolio during a rebalance. Aperio handles all updates consistently and does not override the approved, vendor/source-provided data sets.

Aperio is dependent upon data and information that may be incomplete, inaccurate, or unavailable, which could adversely affect the assessment of companies based on ESG factors. Aperio cannot guarantee the accuracy of the data disclosed by companies or the estimates made by third party vendors such as MSCI when data are missing, and therefore, cannot guarantee the accuracy of the carbon emissions or carbon intensity measures of a client portfolio or benchmark. As a result, Aperio’s Social Scores are based on information with inherent limitations. Scores should be viewed solely as directional; and their accuracy is not guaranteed. 

Portfolio Management Implementation Process

The Aperio Portfolio Management team uses data from the Component Scoring described above for the investible universe and integrates the data into the relevant strategies as indicated by our Clients’ indicated investment guidelines. ESG strategies, tilts and exclusions alter Aperio’s ability to track a portfolio’s benchmark. The forecasted deviation is measured using tracking error calculated by the Barra Risk Model.  This deviation can be significant.


1 Elon Musk, Twitter post, May 18, 2022, 9.09 a.m.
2 Source: MSCI ESG Research. Sustainable Impact Solutions–Maximum Percentage of Revenue. This field represents the total of all revenues derived from any of the 13 social and environmental impact themes including nutrition, sanitation, major diseases treatment, SME finance, education, or affordable real estate; and alternative energy, energy efficiency, green building, pollution prevention, or sustainable water. Overlapping scores may occur in certain themes.
3 Scores based on Aperio Environment Strategy, Aperio DEI Strategy, and Aperio Governance Strategy.
4 An Aperio Social Score provides a means of translating a values profile into a single quantitative score that is used in the portfolio construction process to tilt toward companies with investor desired ESG characteristics, while optimizing for risk. See Important notes for how Aperio compiles its Social Scores.
5 As of July 2022.


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