Hindenburg controversy: Adani takes blow at ESG funds as strategy fails test

Stocks bearing the Adani name appear in more than 500 so-called Article 8 funds, which are supposed to “promote” ESG goals, provided the companies in which they invest follow good governance practices under EU rules, As per the compiled data. Bloomberg,

Of these exposures, 80% are through direct holdings, while the rest are mostly through funds or index trackers, the data shows, which is true for duplicate holdings.

In form of Adani Group As companies are removed from indexes and placed under review amid allegations of improper use of offshore tax havens and stock manipulation, ESG investors are once again left wondering which strategies to hedge against risks such as greenwashing and poor governance. Why – often at an extra charge – didn’t protect them from the latest downturn.

what are esg funds

ESG funds are investments that make investment commitments based on environmental, social and governance factors. A firm that invests in an ESG fund should be well run and also have a positive impact on the environment and society.

At the same time, ESG funds seek to benefit society and the environment while generating financial returns.

ESG analysts believe that the strong headwinds faced by the Adani Group could have an impact on other Indian firms accessing offshore ESG-linked financing schemes.

One person tracking ESG investments has termed the Adani crisis as a bad omen for India’s green energy ambitions.

Selling in seven listed subsidiaries of the Adani group over the past three weeks has eroded nearly $120 billion in group market value, according to a late-January report by US-based short seller Hindenburg Research.

Funds with nearly $10 billion in assets under management that track the MSCI ESG index hold shares in Adani Enterprises Ltd alone, according to an analysis by Anthropocene Fixed Income Institute. The institute has been studying the Adani group since mid-2020.

In a report published on Adani on February 9, Ulf Erlandson, chief executive officer of AFII, and its head of fixed-income research, Stephanie Melnik, wrote: “We are of the view that ESG investors with this unfortunate exposure should engage with their managers And, potentially, regulatory bodies that are in a better position to investigate why this index-fund inclusion has occurred.”

Patrick Wood Uribe, CEO of Util, an ESG research firm backed by private equity and venture capital investors, said the Adani debacle exposed some fundamental flaws in the approach adopted by many ESG index and rating providers as well as portfolio managers.

“There can be a huge mismatch with what investors are expecting,” Wood Uribe said in an interview when they put their money into a company or fund classified as ESG. and for “dissatisfying” ESG rating-eliminated investors by offering an “overly simplistic approach”, he was quoted by Bloomberg,

27% of Article 8 funds meet its stability requirement

In an effort to address such concerns, the European Securities and Markets Authority has proposed to introduce a minimum threshold that would require Article 8 managers to apply stricter standards to their ESG claims. A recent analysis by Morningstar Inc found that if the ESMA proposal is adopted, only 27% of Article 8 funds would actually meet its sustainability requirement.

Adani companies were also held by 11 funds registered as Article 9, which is the EU’s highest ESG classification. Of these, eight were through Direct Holdings, according to a Bloomberg analysis. To justify an Article 9 designation under EU regulations, a fund manager needs to prove that the portfolio is 100% sustainable, with allowances for hedging and liquidity needs.

Util’s Wood Uribe said ESG fund managers are under “increasing pressure” “to be clear to investors about exactly what they are offering and what that means.” “There remains massive opportunity and a huge gap in actually meeting some of those sustainability objectives, what investors want to see in terms of actually sustainable investing.”

Utile also notes that Adani’s stock documents were full of the kind of ESG jargon that portfolio managers often look for. In its rebuttal to the Hindenburg Report, Adani often cited the group’s adherence to ESG principles, and pointed to the adoption of several global ESG frameworks, including the Task Force on Climate-Related Financial Disclosure (TCFD) and the Sustainable Development Goals (SDGs) . among others.

Adani has denied all the allegations, calling them “malicious”, “baseless” and a “planned attack on India”. It referred to the Hindenburgs as “the Madoffs of Manhattan”, referring to the late financier and fraudster Bernie Madoff.

Meanwhile, ESG rating firms have given markedly higher scores to certain corners of the Adani Group. As per the data from MSCI website, Adani Green Energy Ltd and Adani Total Gas Ltd still hold “A” rating in MSCI Inc. Adani Transmission Ltd is rated “BBB”.

All three have lost more than a third of their value since the Hindenburg Report was published. A spokeswoman for MSCI said the firm is about to review its ESG and climate indices, which could include changes, as early as this week.

Wood Uribe said, “It is a conglomerate with operations in commodities, utilities, gas and airports” and “engaged in some of the most controversial coal mining projects in recent history, including the largest open-pit coal mining operation also includes.” In a written analysis of the Adani Group.

“Thanks to the ‘complex structure’ and ‘multiplicity of subsidiaries’ cited in the Hindenburg Report, Adani has been able to finance its dirty operations with the proceeds of a steady fund flow over a long period of time,” he added.

Asia ESG Fund doubles global market share

Meanwhile, in Asia, ESG funds have doubled their international market share as political and regulatory upheaval for environmental, social and governance investments in the US and Europe warms.

Analysts at Barclays Plc, including Dave Dai, wrote in a note that Asia funds posted net inflows of 15% last year, compared to 4% globally. Barclays noted that Asia’s ESG fund market share doubled from 2% to 4% at the end of 2020.

The analysts further said Asia’s net inflows into ESG stock and bond funds, compared to 5% for non-ESG funds in the region, are showing “strong investor appetite for sustainable investing”.

with agency inputs