About 770 ESG funds worldwide hold shares of Adani Green Energy Ltd., which has lost nearly a quarter of its value after US prosecutors charged Gautam Adani with suspected bribery. It is one of a group of companies in the Adani empire that have made it past the ESG screen, only to be dumped by investors as they digest a new litany of alleged transgressions.
“Adani Green’s dire reign was in plain sight,” said Henry Kinnerley, co-founder of short-seller Snowcap Research.
Another short seller, nearly two years after a report by Hindenburg Research accused the Adani Group of decades of fraud and market manipulation, federal prosecutors in the U.S. allege that Adani and some people around him promised more than $250 million in bribes. . Indian government officials in exchange for solar energy contract for Adani Green.
Adani Group has denied these allegations. But news of the US indictment wiped about $27 billion off Adani Group’s combined market value as investors digested the details.
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Most of the funds that Adani Green owns are marketed as either “promoting” environmental, social and governance metrics or as purely “objective” ESG, categories covered by European Union regulations.
BloombergTogether, the 770 funds oversee nearly $400 billion, and some of them are managed by some of the world’s largest asset managers. On average, Adani Green’s holdings are less than 1% of the fund’s net asset value.
ESG fund managers must apply additional screens to protect investment clients from environmental, social and governance risks, for which they often charge high fees. But in practice, the label has repeatedly failed to deliver.
Bloomberg previously reported that ESG funds were holders of Russian assets as Vladimir Putin invaded Ukraine. Its holdings extend to government bonds and state-owned oil and gas companies. ESG funds were also wronged by the sudden collapse of Silicon Valley Bank early last year after it failed to react to rising governance risks.
The fact that hundreds of ESG funds are still exposed to Adani Green is “surprising”, according to Mohit Mirpuri, portfolio manager at SGMC Capital Pte. which said it had sold its exposure to the company’s bonds at the end of 2022, over concerns the company was relying too much on leverage.
“There is no case for holding shares now,” and the continued presence of ESG funds in the company “raises questions” over their ability to properly screen for governance risks, he said.
Investors who have long avoided ESG are using this to extricate themselves from the industry’s apparent failures.
Barry Norris, founder and chief investment officer of UK hedge fund Argonaut Capital Partners, said the example of Adani Green shows that the ESG movement is perfectly capable of harboring “malfeasance, chicanery and skullduggery” and doing so “under the cloak of ethics”.
Index providers have faced some heat for their approach to due diligence when assigning ESG ratings that determine how easily a company is included in exchange-traded funds and other passive strategies. Adani Green has about 70 ETFs tracking ESG benchmarks, Bloomberg data shows.
In its complaint, the Securities and Exchange Commission said Adani Green used the “A” rating from MSCI Inc.’s ESG research unit to lure investors for the 2021 bond sale.
MSCI downgraded Adani Green to “BBB” in July 2023, nearly six months after the Hindenburg report. The company is now “closely reviewing” recent developments in the Adani case, a spokesperson told Bloomberg. MSCI flags allegations of business ethics and fraud, including bribery, the spokesperson said.
Morningstar Sustainalytics gives Adani Green a risk score of 14.3 on a scale of zero to 100, where 100 is the worst rating. It also assigns the company a so-called risk category of “low”.
The rating is “primarily driven by the company’s perceived risks related to material environmental and social issues, including human capital, occupational health and safety, land use and biodiversity, as well as production governance,” said Hortense Baioy, global head of sustainability research at Morningstar. Sustaanalytics said in an emailed response to questions.
Bioy also noted that the company has been assigned a “medium” risk score for its corporate governance, which accounts for 31% of the overall ESG issues considered “material for the company”. And Adani Green has been flagged as having “significant levels of controversy with a weak business ethics program and weak political engagement policy.”
The company now faces “increasing financial, regulatory and reputational risks due to new evidence and investigations into its allegedly fraudulent business practices,” Beo said, and Morningstar Sustainanalytics’ analysis “will be reviewed in light of recent events.”
Adani Green is at the center of India’s shift to renewable energy, with a target of generating 50 GW of renewable energy by 2030, equivalent to around 10% of India’s goals. And Gautam Adani, Asia’s second-richest man, is a close ally of Prime Minister Narendra Modi, a relationship that has benefited his expanding business empire.
Most investors expect weak governance or legal frameworks when it comes to emerging markets, and India ranks 93 out of 180 countries on Transparency International’s Corruption Perceptions Index. But Adani Green has “positioned itself as a leader in environmentally conscious, socially responsible and good corporate governance principles,” the SEC said.
“The dilemma of ESG is that many investors chose to ignore the red flags surrounding Adani Green because it operated in the sustainable sector,” said Snowcap’s Kinnerley.
The US indictment “removes the notion that a regime can be evaluated in a foreign market relative to domestic standards,” he said. “Any company raising capital from US investors should clearly be expected to follow US standards.”
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