Adani was ESG
Clues in the capex. EU green seeds. Plus, how did Adani pass the ESG test?
View from the top
🇪🇺 The EU has hit back at the Inflation Reduction Act (IRA) with a stimulus package of its own. Designed to stimulate cleantech innovation and investment on the continent, the Green Deal Industrial Plan includes initiatives to simplify the regulatory environment of, provide faster funding to, enhance the workforce underpinning, and relax trading conditions for green energy projects. Of particular note: Measures to streamline and fast-track permitting for new production sites, as well those geared towards relaxing state-aid rules and providing more manufacturing subsidies. European Commission President Ursula von der Leyen has been emphatic in her ambition to “make Europe the home of cleantech.” Given it currently takes longer to permit a wind farm than to build it, the stimulus may be the type of aggressive action that the EU needs to secure its industrial lead. In addition to stopping a potential flight of money and talent to the US, S&P suggests it could bring capacity back to Europe from lower-cost manufacturing centres in Asia. But at what cost? The FT suggests the panicked ‘race to the bottom’ sparked by the IRA puts the entire EU economic model at risk, as relaxed state aid rules threaten to fragment the single market. For European as for world trade, then.
🛢️ Record-breaking earnings are in for oil and gas companies. Slated as ‘obscene’ (Shell, $40B) and ‘outrageous’ (Exxon, $55.7B), GDP-beating 2022 profits are prompting renewed calls for bigger windfall taxes. Oil majors are pushing back. Their case would be stronger had they a clearer plan for putting their profits to work, argues ESG Investor. Conflicting pressure from investors and customers creates a fertile ground for greenwash. The clues are in the capex. BP is reportedly planning to pump the brakes on its renewables drive. Shell, meanwhile, spends a fraction of its reported expenditure on clean energy, according to Global Witness. In 2021, the oil major claimed it directed 12% towards its Renewables and Energy Solutions division. Global Witness puts the figure closer to 1.5%. Having lodged a complaint with the SEC, the NGO is urging regulators to investigate Shell’s “misleading claims.” CEO Wael Sawan blames Shell’s structural complexity for any confusion, reports ESG Investor. Structural complexity can hide a multitude of sins (more on that below), but it can’t obscure the inevitability of peak oil. As Carbon Tracker noted recently, “an awful lot of oil refinery capacity [is] going to have to be written down.” The mistake, however — as we’ve argued before — is believing that oil companies will go quietly. Or cleanly.
Adani was ESG
Gautam Adani and his eponymous empire have had a bad week.
In late January, US short-seller Hindenburg Research published the results of its two-year investigation into Adani Group. Uncovering “brazen stock manipulation and accounting fraud scheme,” the bruising report claims the industrial conglomerate inflated its valuation artificially through a combination of offshore shell companies and engineered accounting and earnings. The state of its leverage was described as a “house of cards.”
It’s never a good time to be accused of “pulling the largest con in corporate history.” Days ahead of a planned $2.5B share sale definitely isn’t it. By Wednesday of last week, Adani Enterprises was forced to call off the sale. As of today, the rout had vaporised $112B from the market capitalisation of Adani Group’s seven listed companies.
From index providers if not investors, the response was swift. S&P Dow Jones ousted Adani Enterprises from its sustainability indexes, “after a media and stakeholder analysis triggered by allegations of stock manipulation and accounting fraud.” But the unaddressed question remains: Should a dedicated sustainable index or asset manager have had exposure to any Adani subsidiary in the first place?
The dubious value of an ESG score
In its 413-page response to Hindenburg’s allegations, Adani’s defence is peppered with over 100 ESG-related terms and couched in its ESG track record. Prominent coverage of the group’s adherence to various standards and frameworks doesn’t just complement the defence; it is the defence.
We learn about the “ESG credentials and environmental commitments of Adani Portfolio companies,” each of which has a “robust ESG framework and glide path in place, which is focused on assurance framework.” Those include “best-in-class global disclosures and standards like TCFD, SBTi, CDP, SDGs.” Its “governance standards [are aligned with] Global Best practices,” and it recently implemented a “Corporate Responsibility Committee in all… portfolio companies, which does the review of the ESG progress and framework alignment.” Adani is “fully committed to ESG aspects,” as evidenced by its practice of “[identifying] key ESG risks and [adopting] multiple mitigation measures.”
The fact it’s not all fluff says a lot more about ESG ratings than it does Adani.
In recent years, Adani has managed to master ‘sustainability’ (albeit not, as it turns out, on the debt front) on behalf of all its subsidiaries. As recently as November 2022, Adani Ports received a top ESG score from Moody’s ESG Solutions. This is a conglomerate with operations in commodities, utilities, gas, and airports; one engaged in some of the most controversial coal mining projects in recent history, including the largest open-pit coal mining operation — christened the “most insane energy project” — in the world.
Thanks to the “convoluted structures” and “multiplicity of subsidiaries” cited in the Hindenburg report, Adani has long been able to finance its dirtier operations with the proceeds of sustainable fund flows and — more alarmingly — sustainability-linked bonds. Adani Green, a staple in ESG funds, may have funded the thermal coal exploration of its sister companies. Allegations of cross-contamination aren’t, however, new. (For what it’s worth, nor are they restricted to Adani.)
Indexes amplify ESG failings
Back in 2020, Ulf Erlandsson of Anthropocene Fixed Income Institute sat down with Responsible investor to discuss the curious case of Adani Group and its sky-high ESG ratings. “This is not a story about how coal companies can get it right,” said the vindicated bond vigilante, “but rather one about the ESG industry can get it wrong.”
In the same year and a younger iteration of this newsletter, we expanded on Erlandsson’s research by evaluating Adani through the lens of Util data (as below). Our position then — as it is today — was that Adani Group isn’t a logical contender for the FTSE4Good and Dow Jones Emerging Markets sustainability indexes. Nor could we understand why the conglomerate was ranked in the 94th percentile of responsible businesses by CSRHub.
At the time, CSRHub said it doesn’t “pretend to uncover the truth about a company’s social performance,” but instead seeks to “estimate a consensus view of a company based on the opinions of all data sources we can find,” i.e. those of incumbent ESG-as-risk data providers. Those opinions carry serious weight for any company seeking to raise finance. They inform its cost of capital and its odds of gaining entry into the type of sustainability index on which popular ETFs are modelled.
Given their influence, one would hope the ratings are well informed. Not, unfortunately, a given.
In 2020, Adani Ports secured a spot in the Dow Jones Emerging Markets Sustainability Index when CDP bumped its rating to a B- from a C. (Its stock jumped 8% on the news.) The company earned the upgrade because it answered “Yes” to the the question “Have you identified any inherent climate-related risks with the potential to have a substantive financial impact on your business?” The only other details it provided on that front were the fact the risk would be “reputational,” and, if realised, may lead to “increased stakeholder concern or negative stakeholder feedback.”
Disappointingly unimaginative for a company alleged to have pulled the “largest con in corporate history” through “brazen stock manipulation and accounting fraud scheme.” It also suggests corporate disclosures aren’t the only weak link in the ESG data market. Regardless of whether their objective was to evaluate sustainability in terms of risk or impact, plenty of ratings providers got Adani very wrong. It was an expensive mistake.