The problem with ESG ratings

What can India’s largest listed coal utility tell us about the sustainable data market? Arguably, that it doesn't work.

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💵 Moody's reported that global sustainable bond issuance reached $99.9bn in Q2 2020, 65% higher than in Q1. Issuance is projected to hit a record $375bn this year.

🏔️ ETFs will soon usurp active funds as the dominant ethical investment approach, found Invesco, as investors predict most ESG assets will be managed passively in five years.

🔏 It’s been a year since the Business Roundtable pledged to replace shareholder primacy with company purpose. Writing in the WSJ, CEO Josh Bolten takes a look back.

👎 But while Bolten claimed "a good year for stakeholder capitalism," critics have derided the Business Roundtable as a “toothless” shareholder rights regime.

❌ A public consultation of asset managers found almost all oppose the controversial and ostensibly anti-ESG rules recently proposed by the US Department of Labor.

🖥️ Goldman Sachs told the FT it expects big tech, which has a market cap rivalling major national economies, to set the renewables agenda as companies pivot to green energy.

Company spotlight: Adani

What can India’s largest listed coal utility tell us about the sustainable data market?

Quite a lot, according to Ulf Erlandsson. The former bond trader recently published a white paper exploring how Adani (NSE:ADANIPOWER)—which boasts 99.7% coal-based generation capacity—managed to achieve a sky-high ESG score.

"This is not a story about how coal companies can get it right," wrote Responsible Investor, "but rather one about the ESG industry can get it wrong. "

While Adani should be affected by coal investment exclusion criteria, it has instead proved a candidate for best-in-class ESG inclusion.

ESG data aggregator CSRHub ranked Adani in the 94th percentile: well ahead of companies such as Danish renewables giant Orsted, which only ranks in the 85th percentile. It also qualified for inclusion in emerging markets sustainability index FTSE4Good.

Speaking to Responsible Investor, Bahar Gidwani, co-founder of CSRHub, argued that CSRHub does not “pretend to uncover the ‘truth’ about a company’s social performance," but instead aims “to estimate a consensus view of a company, based on the opinions of all of data sources we can find”. He added that it bases its rankings on 14 data sources, including MSCI, S&P Trucost, and Ideal Ratings.

But the manner in which companies are assessed—not to mention inconsistencies among the ratings agencies themselves—make for unreliable conclusions. Adani bagged a top ESG score and qualified for inclusion in the FTSE4Good Emerging index because it does not actually produce coal, it just burns it.

Like Erlandsson, we believe revenue associated with fossil-fuel-generated electricity should factor into the company's overall score. Our analytics put Adani to the test. On the plus side, the company provides affordable energy, furthers economic growth and supports industry and infrastructure. But those positives are hardly enough to justify a high ESG rating, given its performance against a swathe of other social and environmental metrics.

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