June 30, 2022

Tesla’s Sustainability Reputation Will Be Challenged With Shareholder Proposals

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Tesla solar roof home

Courtesy of Tesla


(TSLA) sustainable reputation ordinarily isn’t in question, but shareholder proposals at its Sept. 20 annual meeting are challenging the electric vehicle manufacturer’s employee arbitration policy and its human rights guidelines, demonstrating the complexity of being a sustainable company.

Tesla, the world’s largest electric vehicle manufacturer, epitomizes the revolution to combat climate change by turning away from fossil fuels. It says its mission is to “accelerate the world’s transition to sustainable energy.”

The world is coming around to this way of thinking. As wildfires devastated the West Coast, the Business Roundtable, a powerful emblem of corporate America, announced it would support broad-based measures to slash greenhouse gas (GHG) emissions. This month, the Commodity Futures Trading Commission, which regulates the U.S. derivatives markets, said climate change “poses a major risk to the stability of the U.S. financial system and to its ability to sustain the American economy.”

Yet three of four proposals facing Tesla challenge its success on social and governance factors, two of the triumvirate of ingredients that help define sustainable investing (the third is environmental factors). Without changes, Tesla risks slower growth ahead, shareholder advocates say.

One proposal recommends Tesla change its supermajority voting requirement to a simple majority, which shareholder advocates believe improves corporate governance. A second asks Tesla’s board to prepare a report on its use of mandatory arbitration—in which Tesla requires employees to arbitrate legal disputes with the company instead of in court—and whether mandatory arbitration is related to the “prevalence of harassment and discrimination in its workplace.”

Tesla has been accused of racism and discrimination, including reports of minorities being passed over for promotion, regular use of racial slurs in the workplace and a hostile environment for minority employees. Forced arbitration has been widely criticized, particularly after the #MeToo movement showed that companies use it to hide harassment complaints.

“Mandatory arbitration limits employees’ remedies for wrongdoing, keeps misconduct secret, precludes employees from suing in court when discrimination and harassment occur, and prevents employees from learning about shared concerns,” wrote Nia Impact Capital, which submitted the proposal. “A workplace that tolerates harassment invites legal, brand, financial, and human capital risk.”

A third proposal asks the board to report on Tesla’s processes for embedding respect for human rights within operations and throughout its business relationships. According to the filer, Sisters of the Good Shepherd New York, Tesla’s use of cobalt in its lithium-ion batteries poses human rights risk because 60% of cobalt is produced in the Democratic Republic of Congo, where child labor is pervasive, and that “high injury rates in Tesla’s factories may violate the human right to safe and healthy working conditions.”

“Nobody’s denying they’ve completely disrupted the auto industry and have an environmentally sexy brand,” says Kristin Hull, founder of Nia Impact Capital, in an interview. “But if they’re going to attract and retain top talent, they need a diverse workforce where all voices are heard and welcomed.” Proxy advisors ISS and Glass Lewis support the Nia proposal.

“There are so many litigation risks, reputational risks,especially for a company that presents itself as sustainable,” says Mary Beth Gallagher of the Investor Advocates for Social Justice, speaking on behalf of Sisters of the Good Shepherd. Gallagher noted that the group had approached more than 20 automotive companies about similar issues, but filed a shareholder proposal with Tesla because ‘we didn’t have a very constructive engagement.”

Such changes are necessary to long-term success, say proponents of sustainable investing, because they make the company more attractive to potential employees, customers and the community. Tesla’s success in the short term may fade, as rival automakers introduce their own electric vehicles.

A fourth shareholder proposal is that Tesla consider advertising. Tesla has recommended voting against all four proposals.

Tesla didn’t respond to a request for comment, but in its proxy, the company said arbitration doesn’t limit remedies, that employees are free to publicize the results of an arbitration, and that they don’t limit an employee’s freedom to first file a lawsuit.

Meanwhile, Tesla also said its supplier code of conduct and human rights sufficiently addresses human rights, and that it has adopted what it believes are best practices to identify and remedy any potential human rights issues.

With supermajority voting, the proposals aren’t likely to pass. Hull of Nia Impact Capital says she’d regard it a victory if “just 15% of the vote” supported Nia’s proposal.

Cathie Wood, CEO of ARK Investment Management, an outspoken Tesla bull, says “with very fast paced companies, the risk of (disgruntled employees) happening is higher than at normal companies.” Wood added: “I know that (CEO) Elon Musk has said ‘we need to do a better job on safety,’ that became priority one. When he makes something a priority, it happens.”

Write to Leslie P. Norton at leslie.norton@barrons.com

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