Space Exploration Technologies Corp (NASDAQ: SPCX), or SpaceX, has become one of Wall Street's hottest stocks following its blockbuster IPO, but the company remains notably absent from one corner of the ETF market: ESG funds. The exclusion stems from a June 11 assessment by MSCI, which assigned SpaceX its lowest possible ESG rating of CCC just one day before the company's public debut. The rating cited significant governance risks and severe controversies, placing SpaceX among the weakest ESG performers in its industry.
Nearly 100 ETFs Own SpaceX, But None Are ESG Funds
Despite the poor ESG assessment, SpaceX has quickly found its way into roughly 100 ETFs, including space, innovation, growth and broad-market strategies, per Etf.com.
ESG funds, however, have largely remained on the sidelines. Most ESG methodologies screen out companies with bottom-tier governance scores, severe controversies or low overall ESG ratings. SpaceX's CCC designation effectively disqualifies it from inclusion in many ESG portfolios.
That creates a striking divide between mainstream ETF investors eager to gain exposure to the aerospace giant and ESG managers who continue to avoid the stock.
Where ESG ETFs Stand
The absence of SpaceX from ESG portfolios is particularly notable given the size of some of the funds involved. Among the largest U.S.-listed ESG ETFs are the iShares ESG Aware MSCI USA ETF (NASDAQ: ESGU), iShares ESG MSCI KLD 400 Social ETF (NYSE: DSI), and the iShares ESG Aware MSCI EAFE ETF (NASDAQ: ESGD) and iShares ESG Aware MSCI EM ETF (NASDAQ: ESGE) for international exposure.
Many ESG funds use MSCI, Sustainalytics or proprietary screening methodologies that limit exposure to companies with severe controversies or weak governance practices. Given SpaceX's CCC rating and "orange flag" controversy designation from MSCI, the stock is currently absent from many ESG portfolios even as it has become a holding in numerous conventional thematic ETFs.
That dynamic highlights a growing dilemma for ESG investors. Funds such as ESGU and DSI were designed to help investors avoid companies facing elevated environmental, social or governance risks. However, by excluding a stock that has rapidly become one of the market's most sought-after holdings, they also risk lagging benchmarks if SpaceX's growth trajectory continues.
The debate therefore shifts from sustainability to governance. ESG investors may have missed SpaceX's early gains, but if concerns around shareholder rights, disclosure practices or corporate oversight eventually weigh on the company, ESG funds could point to the exclusion as evidence that governance screens still add value, even as the broader ESG label loses favor with investors.
A Test For ESG Investing
The timing is notable given the struggles facing ESG investing.
Bloomberg Intelligence ETF analyst Eric Balchunas recently noted in a comment thread on X, that ESG has largely vanished from industry discussions.
"I was in Europe for an entire week, sat through multiple panels, networked with a bunch of ETF people, and did not hear the phrase 'ESG' one time," said Balchunas. "That is astonishing vs even 3yrs ago. There were literal entire panels on it w/ a lot of moral posturing etc. I think when the European govt declared nuclear weapons ESG (bc they desperately wanted private investment in defense cos, but inst were like we can't bc you told us we could only buy ESG stocks and so they were like, yeah weapons are ESG now so its cool) everyone knew it was over. The inconsistency was just too blatantly obvious to take seriously," he further posted on the thread.
He pointed to more than 125 ESG ETF closures in recent years and a growing number of funds dropping ESG terminology from their names as investor demand faded.
Critics have long argued that ESG screens force investors to miss out on high-growth opportunities. SpaceX appears to support that argument, at least for now, as the stock has surged since its public debut.
Governance Could Be The Deciding Factor
Yet SpaceX may also offer ESG proponents an opportunity to defend the strategy.
While ESG debates often focus on environmental and social issues, many of MSCI's concerns relate to governance, including corporate oversight, shareholder rights, disclosure standards and insider control. Governance has historically been viewed as the ESG factor most closely linked to financial outcomes.
The key question is whether those risks eventually materialize. If SpaceX continues its ascent, ESG funds may be criticized for excluding one of the market's biggest winners. But if governance concerns emerge over time, ESG managers could argue that their screening process identified risks that the broader market overlooked.
For now, the contrast is difficult to ignore: nearly 100 ETFs own SpaceX, but none of them carry an ESG mandate.