Stockholm (NordSIP) – Indian conglomerate Adani Group continues to suffer in the aftermath of Hindenburg Research’s accusations of greenwashing and fraud. However, Adani does not suffer alone. International investors who were on cue to act as anchors on the now-defunct US$2.45 billion Follow-on Public Offering (FPO) will struggle to reconcile their bet that Adani shares would continue to sore with their sustainability commitments.
The Last Two Weeks
The last two weeks have not been kind to Adani. Following the publication of the damning research, investors started selling Adani stock in drones. By February 2nd, shares of Adani Enterprises had lost 46% of their value on on the eve of the accusations. Unable to stop the haemorrhaging, Adani had to cancel the planned secondary share sale on the same day.
“After a fully subscribed FPO, yesterday’s decision to withdraw offers would have surprised many, but considering the volatility of the markets seen yesterday, our board strongly values that it would not have been morally correct to proceed with the FPO. (…) I have been blessed to receive overwhelming support from all stakeholders, particularly from the investor community. (…) To ensure the investor from potential losses, we have withdrawn the FPO. This decision will not have any impact on our existing operations and even less on our future plans. We will continue to focus on the timely execution and delivery of projects. The fundamentals of our company are very strong,” Gautam Adani, head of the eponymous industrial group argued during a video address to investors on February 2nd.
The company suffered another blow on Thursday, February 9th, when MSCI withdrew some Adani Group companies’ “free-float” designations, which threatens their inclusion in market indices thereby triggering further sell-offs from index-bound investors.
A Spot of Greenwashing?
Beyond the issues raised by Hindenburg Research, the problem is that investors with sustainability claims effectively endorsed Adani Group and its subsidiaries, which are far from ESG-friendly. Adani Enterprises (AE), the company once hoping to sell a large stake las week, is rated as “High Risk” from an ESG standpoint by Sustainalytics, and ranks last (183/183!) among its sector peers. AE as well as Adani Ports and Special Economic Zone and Adani Power are all rated CCC (the lowest possible rating) by MSCI ESG Ratings since 2018/2019. MSCI considers these companies ESG Laggards on most issues. It estimates that AE is ‘misaligned’ with global climate goals, with implied temperature rise estimate of 2.6°C. Even the A-rated Adani Green Energy is estimated by MSCI to be on a path consistent with a temperature rise of 3.5°C.
This is also not the first time that Adani falls on NordSIP’s radar. The company has attracted tremendous criticism for the environmental and social impact of its exploitation of coal mines in Australia, and has been blacklisted by investors, not least BNY Mellon and Norway’s KLP.
Bearing this in mind, one is left wondering what firms such as Jupiter Asset Management, BNP Paribas, Société Générale and Morgan Stanley were thinking when they anchored US$60.4 billion (~ INR 5.03 billion) of Adani’s now-defunct FPO. Approached by NordSIP, BNP Paribas and Jupiter Asset Management were unavailable for comments, as was Goldman Sachs Asset Management, which was cited by the Financial Times in the list of the firms supporting the FPO.
While anchor investments might represent an attractive opportunity for a short-term post-offering price gain, and thereby may not constitute a long-term high-conviction position, they still lend financial support to companies seeking capital and liquidity. In this case, it would be difficult to argue that AE is not a “bad” company from a net-zero perspective. However, all four of the anchors mentioned are signatories of the Principles for Responsible Investment (PRI), the Net Zero Asset Managers initiative and Climate Action 100+. These commitments are supported by seemingly serious statements in their reports and to the press, but this latest episode suggests they are not willing to walk the walk.
Jupiter AM’s Chair, Nichola Pease, noted in the firm’s April 2021 Stewardship report that “Clients want to deploy their capital in an ethical and sustainable way and are considering their investments in a more holistic manner, taking full account of ESG factors and not just financial performance. As a truly active manager, Jupiter is very well positioned to deliver this for our clients.”
When Société Generale joined the UNEP-FI’s Net-Zero Banking Alliance in 2021 as a founding member, the “Group committed itself to align its portfolios on trajectories aimed at global carbon neutrality by 2050 in order to reach the objective of limiting global warming to 1.5°C”. But is the French bank’s investment anchor of Adani really consistent with its claim that it is a ‘pioneer’ with ‘recognised expertise’ in sustainability? “Among other things, sustainability is about a shift in capital allocation: how we deploy capital and engage with the companies and markets in which we invest on our clients’ behalf is key to building a better future. Asset managers are strongly positioned to direct investment to more sustainable companies and to influence the boards and management of companies, challenge their business models and ultimately hold them accountable,” Sandro Pierri, CEO of BNP Paribas Asset Management stated in the firm’s 2021 Sustainability report.
“As a global leader in financial services, Morgan Stanley has a responsibility to the communities in which we live and work. Extreme weather events continue to drive home the daunting reality that the climate crisis is already with us (…). We are committed to using our resources as a financial institution to help in these areas,” James P. Gorman Chairman and CEO of Morgan Stanley is quoted on the bank’s 2021 Sustainability Report. “Effective governance, ethical business conduct and support for our employees underpin both our business success and our approach to sustainability. Our firm’s core values guide our sustainability strategy to deliver results today while doing our part to contribute to a sustainable future,” the same report explains.
Some Insights from Scandinavia
In the immortal words of Marie Kondo, Adani is not a topic that much seems to ‘spark joy’. Even other investors who shun this stock, such as Triodos Investment Management and Schroders declined to comment.
We had more luck at home, where Andreas Johansson, Head of Quantitative Equities at SEB Investment Management, was kind enough to give us some insight into how investors can think about exposure to Indian growth and development and how SEB IM’s internal sustainability ratings have contributed to eliminating Adani entities from the asset manager’s active portfolios.
“We manage funds that invest in developing countries and where Indian companies are part of the investment universe. The customers that have invested in these products want exposure to the specific characteristics of developing countries especially the potential for high economic growth,” Johansson tells NordSIP.
“India with a rapidly growing population and fast pace of technology penetration is by some economists expected to be the third largest economy by 2027. […] The corporate governance standards that we adhere to are sometimes less stringent in the developing world. Political risks are also higher, and many developing countries rank poorly on metrics such as corruption,” Johansson adds.
“We cover several Adani Group companies in our internal sustainability rating. Out of the nine companies we cover three have negative scores, five have scores that are about average and only one, Adani Green Energy, has a high score. We are not invested in any of the companies in our actively managed portfolios. This has been a decision based on a combination of norms based breaches, fossil fuel involvement, limited availability of sustainability information and research into the holding structure of the Adani Group in relation to alleged involvement of some companies with the Myanmar military rule,” Johansson explains.
“This is a perfect example of how one needs a multifaceted approach to handling sustainability. In this case, our combination of the internal sustainability assessment, sustainability policy and the individual sustainability considerations of the investment team has contributed to a decision not to hold these companies in our active funds,” Johansson concludes.
