Can You Trust Your ESG Data Provider?
As the Adani Group companies are stripped from indexes and put under review amid allegations of improper use of offshore tax havens, stock manipulation and coal financing misdemeanours, ESG investors are once again left questioning why a strategy intended to shield against risks such as greenwashing and bad governance – mostly at a premium fee – did not protect them from this ESG debacle.
We analyse the 3-year actual exclusions trend (blue line) of Adani Enterprises by a group of 100 institutional investors who globally own assets in excess of US$30 trillion, the data is from BigTXN's proprietary exclusion monitoring system and covers the only known universe of excluded corporates of its kind.
The polynomial trend (red line) posits that information started becoming available on Adani Enterprises' violations after mid-2021 and rose sharply thereafter;
We normally observe a handful of investors possessing information on a corporate name in at least one violation category before this information is socially democratised to reach other investors;
The step change of 66% in the number of excluders from December 2021 to March 2022 is not only astonishing but quite telling of what happened when a group of investors found something fishy in Mauritian waters, after the June 14, 2021 freezing of shares held in Adani Group companies by three funds based in Mauritius.
The National Securities Depository of India froze trading of Adani’s shares, while it investigated the three funds, owing to related-party concerns and insufficient information about their underlying investors. All three funds were red-flagged for being registered at the same address and appeared to have a combined $6 billion or so in Adani Group assets. [1]
“Adani has rejected allegations of financial impropriety, but as investors, it has become apparent to us over many years that in emerging countries where large energy, industrial or commercial projects are involved, ‘stuff happens’, and not just within emerging market companies either, but in western quoted companies as well.” [2]
—Sharon Bentley-Hamlyn
Adani Enterprises had the following standing in BigTXN's dataset as at 31/12/2022:
Entity Risk Rank: 0.898
Overall Risk Consensus: Universal (Severe)
Top Violation Categories: Business Ethics, Coal, Human Rights, Tax Practices
Percentage of Exclusions: 63% (63 out of 100 investors)
UNGC Violations: Yes
None of this should have come as a surprise but most ESG data (risk and ratings) providers failed to capture this information at all, some did so with large lags, and others did so well after the Hindenburg report. [3]
If anything, ESG data providers' scoring allowed Adani, a prolific UNGC violator and failed ESG case, to frequently cite the group’s adherence to ESG principles, and point to its adoption of multiple global ESG frameworks, including the Task Force on Climate-Related Financial Disclosures (TCFD), Sustainable Development Goals (SDGs), and its UNGC passeport among others.
With over 500 so called Article 8 funds classified under EU SFDR containing Adani issuances [4], it becomes more the obvious how ESG data providers’ methodologies and their resultant output have helped drive billions in capital to unscrupulous operators like Adani in the name of ESG and sustainable investing, unconstrained and largely unregulated.
[1] A strange news report briefly rattles the Adani Group
[2] The Parlous State of ESG by Sharon Bentley-Hamlyn (Aubrey Capital Management)
[3] Sustainalytics downgrades three Adani companies' governance scores
[4] Adani Shock Rips Through ESG Funds as Strategy Fails Test
