Will Tesla’s Bitcoin Buy Hurt The Company’s ESG Rating?

By Rupert Hargreaves


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The Tesla bitcoin buy has split opinions between investors and analysts. It could significantly impact the company's environmental credentials.

When Tesla announced its Bitcoin investment last week, it split opinions among investors and analysts.

Some analysts praised the company for taking Bitcoin into the mainstream. In contrast, others asked why the business was taking such a substantial risk considering the fact that it has not made a consistent profit since its IPO.

The latest analysis suggests that Tesla has made more money on its Bitcoin investment than it did throughout the whole of 2020 from manufacturing electric cars, its primary line of business.

The Tesla Bitcoin profit

Tesla made headlines around the world when it revealed a $1.5 billion Bitcoin investment, disclosing in an annual report that the purchase would help “diversify and maximize returns on our cash that is not required to maintain adequate operating liquidity.”

And since the electric vehicle manufacturer announced this acquisition, the value of the cryptocurrency has rocketed higher, reaching an all-time high of $57,000 last weekend. Following this performance, the company is on track to generate more money from its Bitcoin investments than from selling electric vehicles in all of 2020, that’s according to Dan Ives, an equity analyst at Wedbush Securities. Tesla reported a profit of $721 million from operations in 2020. Meanwhile, Wedbush put the total capital gain from the firm’s Bitcoin buy at close to $1 billion in a research note released last week.

Tesla’s Bitcoin buy has disrupted the company’s business model. The fact that the firm has now earned more from the trade than manufacturing electric cars isn’t the only reason. It has also disrupted the group’s environmental credentials as well.

Environmental credentials

Tesla is considered to be one of the most disruptive companies of the past few decades.

The business has revolutionized the electric vehicle market. Its electric cars showed consumers that electric vehicles didn’t have to be dull and boring with a limited range. They were well designed, fast, and incredibly fashionable. The company has also made progress in recent years, bringing the cost down to reasonable levels.

Other auto manufacturers have rushed to catch up with the company, and as a result, the electric vehicle market is now booming. Without Tesla and Elon Musk driving the business forward, it seems unlikely we would have seen the same kind of growth.

The company’s role in the electric vehicle revolution suggests that it should score highly on Environmental, Social and Governance (ESG) benchmarks.

Low carbon rating

It does when it comes to low carbon scoring. According to S&P Global, which is responsible for compiling the S&P 500 ESG Index, the sustainable counterpart to the S&P 500, Tesla has a “near-perfect” score of 99 when it comes to evaluating the company on its low carbon credentials.

However, this is just part of the equation. The Environmental rating is based on the analysis of several different qualities, not just carbon use. It also includes qualitative factors such as environmental reporting, climate strategy, and environmental policy and management systems. On these factors, the company scored relatively poorly in S&P’s framework with a total of 28 out of 100 for Environmental factors.

Tesla’s ranking for Social factors was even lower. S&P’s analysis of social metrics such as human capital development, social reporting, and labor practice indicators produced a Social score of 6.

However, the company scored highly in Governance with a rating of 49.

Overall, Tesla’s S&P ESG Score was 22 out of 100 for 2020. For comparison, General Motors’ score is around 30. These scores are only rough estimates based on publicly available information, so the figures and their inputs are all open to interpretation. Moreover, they can change from year to year. Tesla’s Governance score, for example, nearly doubled last year after the company made changes to its governance structure.

Unfortunately, the company’s decision to buy such a large amount of Bitcoin may have a substantial negative impact on its ESG score next year.

The economic impact of Bitcoin

Trying to determine the environmental impacts of Bitcoin trading and mining is not easy. However, the latest estimate from Digiconomist pegs the carbon footprint of Bitcoin at just under 37Mt of Co2 per annum.

The total annual electricity consumption is comparable to that of Chile. Meanwhile, the e-waste generation is at similar levels to Luxembourg. Each transaction leaves a carbon footprint equivalent to just under 700,000 Visa transactions or 52,000 hours of watching YouTube.

These figures are staggering. They suggest if Tesla starts accepting payment for its vehicles in Bitcoin, each transaction will use as much energy as 700,000 equivalent card transactions. For a company that’s so concerned about the environment, this factor cannot be overlooked.

Tesla’s ESG rating

The figures suggest that Bitcoin is an incredibly energy inefficient way of transferring wealth. As such, it seems likely that Tesla’s substantial investment in cryptocurrency will have a significant negative impact on its ESG rating.

From an ESG perspective, the company has everything to lose and nothing to gain. As noted above, it had a “near-perfect” carbon reduction score in 2020. This suggests that unless the company and its management take action to offset the extra emissions created by using Bitcoin, the ESG rating will suffer.

The environmental problems of using Bitcoin are not the only issues that may impact Tesla’s ESG rating.

The rating encompasses social factors as well, where Bitcoin has a mixed reputation. Policymakers and authorities have repeatedly expressed their concern about how cryptocurrencies can be used for criminal activity. What’s more, much of the crypto industry is located in China, a country with a questionable human rights record.

China also relies heavily on coal-fired power stations to produce energy. Not only is this bad for Bitcoin’s environmental credentials, but China’s coal mining industry is also notoriously dangerous. Fires, floods and explosions claim up to several thousand lives a year in the country’s coal mines.

The Tesla Bitcoin trade: Conclusion

Overall, it seems likely the Tesla Bitcoin investment will damage the company’s ESG ratings. Each Bitcoin transaction is incredibly energy inefficient, and the cryptocurrency mining industry does not have a good Environmental or Social track record. These factors are bound to come into consideration when analysts are reviewing the firm’s ESG ratings in the future.


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Author: Rupert Hargreaves

This article does not provide any financial advice and is not a recommendation to deal in any securities or product. Investments may fall in value and an investor may lose some or all of their investment. Past performance is not an indicator of future performance.

Digitonic Ltd, the owner of ValueTheMarkets.com, does not hold a position or positions in the stock(s) and/or financial instrument(s) mentioned in the above article.

Digitonic Ltd, the owner of ValueTheMarkets.com, has not been paid for the production of this piece by the company or companies mentioned above.

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