On December 21, electric vehicle maker Tesla will finally join the S&P 500, making it one of the 10 most-valuable companies on the index. The committee that regulates which companies make up this market indicator puts them through a rigorous selection process, aimed at keeping it balanced and as representative as possible: to prevent speculation, it only admits companies that have enjoyed a minimum of four consecutive profitable quarters, a milestone Tesla surpassed this summer. Perhaps this will silence the skeptics who for so long have insisted Elon Musk’s company had no future.
More than $11.2 trillion in financial assets are linked to the composition of the S&P 500, of which $4.6 trillion are index funds: overnight, all those investors who keep their money in such funds will become shareholders in the company, which will see demand for its shares increase significantly.
Why has the S&P 500 Index invited Tesla to join its ranks? Firstly, recognition that companies which are part of an economy that recognizes the importance of sustainability and decarbonization are now an increasingly attractive proposition. Tesla was the first brand that managed to make a desirable electric vehicle with a far superior driving experience to any of its gas guzzling competitors. If you like driving, then you should definitely take a Tesla out for a test drive.
But what makes Tesla so special is that it is so much more than a vehicle manufacturer: it can sell you from a battery for your home or one for industrial use, a solar roof, or a recharge on its network of superchargers. Musk has also created an aerospace company that has beaten the historic NASA suppliers in terms of results, and has also taken advantage of its rockets to put into orbit a huge network of significantly cheaper satellites than their predecessors, and that will soon provide services such as internet access and GPS. Musk’s empire also includes a company working on transportation tunnels under cities, along with another for ultra-high-speed trains based on magnetic levitation that operate in a vacuum. Not a bad portfolio.
But beyond Tesla and the genius of Elon Musk, his company’s entry into the S&P 500 foreshadows something much more important: from now on, the vast majority of surprises we will see in terms of growth and investment will come from the green and sustainable economy. In December 1999, Yahoo! entered the S&P 500, signaling the arrival of the digital economy. Now, with the perspective of 20 years, we can perfectly understand what that meant and the magnitude of that change.
With Donald Trump’s dark period in the White House over (aside from the shadow he has cast, there’s his obsession with oil and coal and his irrational denial of the climate emergency), Joe Biden is set to introduce a package of measures that includes a more-than $1.7 trillion to speed up the transition to electric vehicles via subsidies to buy one, removing old fossil fuel vehicles, building recharging infrastructure, insulating homes, installing solar roofs, capturing atmospheric carbon dioxide, and a root and branch overhaul of the country’s power generation grid to dramatically increase the contribution made by solar and wind; measures that the Biden administration says will create more than 10 million jobs.
In short, Tesla’s entry into the S&P 500 is no accident. It reflects the emergence of a new economy based on sustainability, which will be popular with voters as well as investors. This is an essential transition if we want to have a future on this planet.
Companies that fail to grasp the magnitude of the change now underway, the need to carry it out or the opportunity it represents, will soon find themselves out of step and then out of business.
About the Author
This article was written by Enrique Dans, professor of Innovation at IE Business School and blogger at enriquedans.com.
