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Bitcoin burn: is Tesla an ESG stock?

Read more at www.investorschronicle.co.uk

Do you hold an S&P 500 tracker fund? If so, congratulations: you have inadvertently become part of the crypto investment craze.

I am, of course, talking about the $1.5bn (£1.08bn) bitcoin investment recently announced by Tesla (US:TSLA). The move by the electric carmaker only furthers the impression that high-profile institutions are slowly pushing and shoving cryptocurrency into the mainstream and, indirectly, into your portfolio.

This latest development brings one major constituent of the main US equity market together with the world’s leading cryptocurrency, and both do seem surprisingly well matched in many respects. Tesla stock and bitcoin have both been notoriously volatile and highly divisive – while also proving extremely lucrative for their investors in the last year.

That said, the two are at odds in another respect that might trouble environmental, social, and corporate governance (ESG) investors. While Tesla stands out in part due to its credentials as a leader in the clean energy revolution, the bitcoin mining process is extremely energy-intensive and notoriously bad for the environment. Recent best guess estimates from the University of Cambridge suggested that bitcoin used more than 120 terawatt hours a year. For context, that would mean it consumes nearly as much energy as Norway. If Tesla’s bitcoin stash looks minuscule in the context of the company’s roughly $800bn market capitalisation, this still seems problematic.

As with any potential ESG upset, it’s worth looking at which funds are affected. An obvious one here is the £2.5bn Baillie Gifford Positive Change fund (GB00BYVGKY80), which had a 9.7 per cent stake in Tesla at the end of 2020. The investment team declined to comment on the recent news –although if they keep the faith in Tesla, it should also make its way into what is now the Keystone Positive Change Investment Trust (KPC). The Positive Change team recently took over the trust’s portfolio, which is to be run using the same philosophy as the open-ended fund.

The good news is that the fallout for ESG funds is otherwise relatively limited, as far as UK investors are concerned. Unlike some low-carbon funds in the US, the enormous iShares Global Clean Energy UCITS ETF (INRG) has no exposure. Those ESG funds available in the UK that do hold Tesla tend to have little exposure and not so many investors themselves. The €115.6m VanEck Vectors Sustainable World Equal Weight UCITS ETF (TSWE) had a 2.4 per cent position at the end of January, while the €307m (£268m) Aegon Global Sustainable Equity fund (IE00BYZJ3771) had a 2.8 per cent weighting at the end of last year. The Tesla question is mainly one for the Positive Change team and those who hold that fund.

The news does, of course, raise questions about Tesla’s governance, as well as its role in portfolios. Lothar Mentel, the chief executive at Tatton Investment Management, recently argued that signs of the business straying beyond its core competencies should worry shareholders. “A car manufacturer investing in bitcoin and changing its corporate structure to do so is a major concern,” he said.

That’s all sensible enough – but I would argue that if unusual corporate behaviour concerns you, Tesla should already have set alarm bells ringing back in 2018, the year Musk tweeted about plans to take the firm private with “funding secured” (it was not). It may well be issues like this, and broader governance concerns, helping to keep the carmaker out of most ESG funds.

Read more at www.investorschronicle.co.uk

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