As Adani Group stocks tanked last month, following revelations of fraud and market manipulation at the Indian conglomerate, some investors in ESG-focused funds were surprised to find themselves exposed to losses.
Adani Enterprises, with its history of misdeeds, from strip mining Indigenous lands to doing business with genocidal regimes, is just the sort of group these funds seem designed to exclude. But many didn’t—and still don’t.
Despite recent criticism claiming ESG-focused funds put investors’ financial interests in jeopardy by taking ESG considerations too far, the Adani debacle may in fact demonstrates the opposite.
One reason is that the most-used ESG ratings systems, which determine a company’s inclusion or exclusion from most ESG-focused funds, don’t accurately reflect real-world ESG practices. Some ESG ratings firms still rely heavily on what companies say they do instead of evidence of what they’ve actually done.
The content of corporate policies and a company’s own survey responses can outweigh testimony from workers and communities directly affected by its operations. Whether or not you’re a proponent of double materiality (and I am), such testimony is an important measure of what’s happening on the ground and behind closed doors—essential for understanding a company’s real-world impact and for predicting the risks its ESG practices pose for the future of its business.
In the case of Adani, testimony from affected groups has long shown that its companies are, to put it mildly, reckless with their social and environmental impact. Indigenous groups in Australia have for years campaigned against Adani’s Carmichael coal mining project, which has proceeded on their ancestral lands without consent, destroyed threatened species’ habitats, and will turbocharge the climate crisis by producing coal that, when burnt, will create up to 4.6 billion tons of carbon emissions.
The Carmichael mine is not the only Adani Group project marred by human rights violations and environmental destruction. Adani companies have, among other things, done business with Myanmar’s criminal junta and plan to mine billions of tons of coal beneath ancestral forests in India. And evidence suggests its Indian workforce has faced rampant exploitation.
Paying attention to human rights
Some might argue that the Adani Group was brought to its knees by allegations of fraud unrelated to its known environmental and social recklessness, but no one who has been watching the group’s unapologetic trampling of the environment and human rights over the past decade is surprised that it was also cooking the books.
Unfortunately—for investors and affected communities—MSCI and other leaders of the ESG investing industry weren’t paying attention, which is reminiscent of communities and their advocates raising alarms about Posco, Elbit and dozens of other companies that, like Adani, are benefitting from ESG investment despite business ties to Myanmar’s military regime.
Some ESG indexes and funds have now, belatedly, dropped Adani properties, but the inclusion of companies with similar human rights issues continue to raise eyebrows. Take the Swiss-based mining company Glencore, which has been accused of “extreme abuse” and exploitation of children in the Democratic Republic of Congo, and last year paid $1.1bn to settle charges of a decades-long bribery, corruption and market manipulation scheme. Despite its dubious record, including financially material consequences for investors, Glencore stock is currently held by at least 14 ESG-labelled funds.
Policymakers and regulators should start requiring that ESG ratings and index products reflect the real-world environmental and social impact of companies to which they direct capital, as it is investors who will pay a price when the inevitable financial fallout of irresponsible corporate behaviour materialises.