There is a growing consensus among investors that environmental, social and governance (ESG) risks can significantly impact the bottom line of the companies they own. Depending on a company’s business and operations, these risks can come in many different forms, including in relation to climate change, supply chain management, ethical business practices, and stakeholder and community relations. And then there are companies that appear to have exposure to risks from each category – see, for example, the upcoming shareholder meeting of Adani Enterprises Limited.
The Indian conglomerate has seen a meteoric rise in its share price, which is up more than 1,000% in the past year. Yet that growth has done little to dispel concerns with the company’s Carmichael mine in Queensland, Australia. This highly controversial project illustrates a conundrum faced by many companies and investors in the energy and extractives industries: companies are still able to make significant profits from projects that may not be aligned with broader climate goals.
Despite a global shift towards cleaner sources of energy, Australia remains a major coal exporter. Once complete, the Carmichael mine could be the largest source of coal in the country. As a result, the project has generated significant scrutiny from NGOs, the media, and investors. Their concerns aren’t isolated to the impact of extraction and emissions: most of the output is slated for export, and the planned route goes through the Great Barrier Reef, raising significant concerns about potential damage to this fragile ecosystem.
Scrutiny has spilled over beyond Adani itself to the other companies involved in the project. In response the Queensland Government, Australian and Chinese banks, and Rothschild & Co., among others, have withdrawn from financing the Carmichael mine, and investors have registered their concerns with the State Bank of India over its involvement in funding the Carmichael Mine project. The State Bank has also faced pressure from asset manager Amundi, which threatened to remove the bank’s green bonds from its Planet Emerging Green One Fund. Similarly, multiple contractors, including Downer EDI and AECOM, have stepped away from the project, largely as a result of public and investor outcry. In addition, the contractors that remain involved are having trouble obtaining insurance coverage for their work on the project.
Adani is not a stranger to environmental controversy. Over the past decade the group has been the subject of concerns regarding a coal and oil spill along the coast of Mumbai and large-scale environmental destruction and contamination in India’s Gujarat province. Moreover, Jeyakumar Janakaraj, who spent years overseeing the Carmichael project for Adani Australia, before being promoted to CEO of Adani Global Singapore in December 2020, previously served as Director of Operations for Konkola Copper Mines. Konkola was charged with massively polluting a river that serves as a source of water and food for about 40% of the Zambian people.
Moreover, the group’s risk profile extends beyond environmental impact. Across various projects, the company has faced allegations ranging from collusion to utilizing overseas tax havens to exaggerating production costs. In relation to the Carmichael mine, Adani has been accused of misleading regulatory authorities and of misconduct in relation to aggressive lobbying, which has included a battery of lawsuits to pressure the government and the use of private investigators to silence critics.
To date, these issues have not stopped the Carmichael project. However, they appear to have had a significant impact on its scope and profitability. That includes both reducing the mine’s potential output, and upfront costs like the A$107 million penalty issued in August 2020 by the Queensland Supreme Court. The penalty came in connection with a finding that Adani Group company Adani Abbot Point Terminal Pty Ltd (now North Queensland Export Terminal, or NQXT) engaged in unconscionable, monopolistic conduct in its dealings with other users of the terminal. Notably, the ruling states that NQXT likely received direction from the Adani Group’s leadership, including its chairman.
Moreover, not all the legal and regulatory hurdles have been cleared. In May 2021, a federal court ruled that the government had made a “legal error” in the way it previously assessed and approved Adani’s plans for using water from a Queensland river in connection with the Carmichael project. In response, the company said that the project would continue, but questions remain regarding alternative water sources.
In the context of the extensive environmental issues posed by the Carmichael project, these legal, reputational, and supply chain concerns may read like a footnote, but each one provides a window of potential exposure that could ultimately be material to the bottom line. As Adani illustrates, it can be challenging to stay aware of all the risks associated with a single company, let alone an entire investment portfolio.
Glass Lewis can help, with essential expertise and powerful tools for investors looking to integrate a focus on ESG and sustainability into their governance and proxy voting. Get ahead of environmental, oversight, legal, and reputational risks with our innovative Glass Lewis Controversy Alerts, fully integrated into the Viewpoint voting platform. Receive crucial alerts that highlight potentially material concerns at meetings across the globe during the height of proxy season and all year long, so you don’t miss important votes. Our timely alerts are designed to provide the details you need to understand the biggest controversies at a glance, giving you time to analyze and take action through voting and engagement.
When you’ve identified the meetings that demand more of your attention, our Proxy Papers give you access to comprehensive ESG research and analysis. Get voting recommendations weeks ahead of deadlines to make the optimal decision for your organization. Our approach is rooted in materiality, with a nuanced understanding of what is actually at stake, and a deep appreciation for the long-term relationship between ESG and financial performance. Unrivalled peer analysis facilitates voting and engagement, allowing you to evaluate comparisons across your portfolio on a wide range of criteria by illustrating how similar public companies are addressing the same issues. We even give companies and proponents the opportunity to respond to our research through the Report Feedback Statement (RFS), and then deliver the RFS to our subscribers with the relevant Proxy Paper.
Glass Lewis’ industry leading analysis is supported by our robust library of thought leadership, including in-depth subject matter guides, white papers, and webinars, covering key emerging topics like Scope 3 emissions, E&S metrics in executive compensation, and carbon asset risk.
For more information on Glass Lewis’ approach to environmental and reputational risks and other ESG issues, visit our ESG Solutions page or click on the button below to request more information.
