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Adani Ports and ESG: Comeuppance Served

Synopsis: This week, S&P Dow Jones Indices announced that they would be removing Adani Ports and Special Economic Zone Ltd. (APSEZ) from their sustainability index due to the firm’s business ties with Myanmar’s military. The USD 20 billion market cap company came under fire because APSEZ was building a $290 million port in Yangon on land leased from the military-backed Myanmar Economic Corporation. This news of APSEZ’s removal was widely covered in Indian as well as international media. EMAlpha AI has picked up several such news flows over the last few days. After this announcement was made, APSEZ stock price saw a correction. However, the other companies in the group didn’t react much. All in all, we think that there are three important questions that come up here: 1) Was this removal expected? – In March, there were campaigns to remove APSEZ from S&P Sustainability Index, followed by a report which stated that leaked documents from the Yangon Region Investment Commission proved that APSEZ was paying $30 million to the Myanmar Economic Corporation in “land lease fees”. It is true that S&P won’t react to every such report, but the pressure was building up, 2) Can a company be scrutinized in isolation on these issues? – Adani Group is one of the most successful and largest conglomerates in India. They have six listed companies in India whose combined market cap is more than USD 100 billion. All these companies are actively controlled and managed by the owner, Mr. Gautam Adani. The question, in this case, is that, should the market judge all the companies separately?, 3) Will Institutional Investors react and if they do, how will the Adani Group respond?– The ESG (Environmental, Social, and Governance) space is evolving very fast and big institutional investment managers are aggressively pushing ‘Sustainability Agenda’. Will some of these Institutional Managers review their investments in APSEZ and will it impact the stock price? It would be interesting to see how the Adani Group would react in case that happens. But the big question is, Will they review their investments in Myanmar?

S&P removing Adani Ports and Special Economic Zone Ltd from its Sustainability Index

S&P Dow Jones Indices has removed Adani Ports and Special Economic Zone Ltd (APSEZ) from its sustainability index due to the firm’s business ties with Myanmar’s military. The USD 20 billion market cap company from India and a major player in the infrastructure space was targeted because APSEZ is building a USD 290 million port in Yangon on land leased from the military-backed Myanmar Economic Corporation (MEC). Myanmar’s military has been in the news recently for all the wrong reasons. The military coup on the 1st of February this year which was followed by a massive crackdown on protests and protesters, in what has been labelled as atrocious human rights violations, has attracted global media attention to Myanmar.

Considering Myanmar’s track record over the last several decades, the negative publicity has further hurt Myanmar’s image. Since the coup, the military has been in constant skirmishes with protesters and activists. Tensions have escalated to such an extent that the companies supporting the Military are also being targeted by activists.

“Adani Ports will be removed from the S&P Sustainability Index prior to the open on 15th April 2021”, S&P Dow Jones Indices said in their statement. This news of APSEZ’s removal was widely covered in Indian as well as International media. EMAlpha AI has picked up several such news flows over the last two days.

13th April 2021

14th April 2021

Impact on stock price of Adani Group companies

Upon announcement of its removal from the Sustainability index, Adani Ports and SEZ Ltd. stock price felt the impact. It was down 9.6% on 12th April 2021. Not only the fall was sudden, that session was also volatile for APSEZ stock.

Table 1: Adani Ports and SEZ Ltd. Stock Price in April

 

Stock Price (Rs)

% change

1st April 2021

736.25

4.82%

5th April 2021

742.25

0.81%

6th April 2021

835.55

12.57%

7th April 2021

814.75

-2.49%

8th April 2021

823.00

1.01%

9th April 2021

823.60

0.07%

12th April 2021

744.65

-9.59%

13th April 2021

731.05

-1.83%

15th April 2021

747.00

2.18%

Source: National Stock Exchange (NSE)

Figure 1: Adani Ports and SEZ Ltd. Stock Price over last one month

Source: Google

However, the stock price of the other companies from the Adani group didn’t react much. In fact, Adani Total Gas Ltd. had a completely opposite price movement.

Table 1: Adani Group Companies – Stock Price Performance

 

Stock Price (Rs)

Performance

 

15th April 2021

1 day

1 week

2 weeks

1 month

Adani Ports and SEZ Ltd.

747.0

2.18%

-9.23%

1.46%

3.89%

Adani Enterprises Ltd.

1124.0

1.60%

-3.31%

1.52%

25.42%

Adani Green Energy Ltd.

1119.0

0.26%

-3.99%

-3.54%

-6.21%

Adani Total Gas Ltd.

1115.9

7.41%

12.35%

5.21%

48.97%

Adani Power Ltd.

90.4

-0.22%

-7.19%

1.23%

14.00%

Adani Transmission Ltd

944.2

5.00%

-5.81%

-5.50%

21.30%

Source: National Stock Exchange (NSE)

Three burning questions going forward

We think that there are three important questions that come up here;

  1. Was this removal expected – In March, there were campaigns to remove (Campaign group asks S&P to review Adani Ports in DJ Sustainability index, 17th March 2021, https://in.finance.yahoo.com/news/campaign-group-asks-p-cut-093916497.html ) APSEZ from S&P Sustainability Index. This was followed by a report, released by the Australian Centre for International Justice and Justice for Myanmar which mentioned that leaked documents from the Yangon Region Investment Commission proved that APSEZ was paying $30 million to the Myanmar Economic Corporation in “land lease fees”. (Timeline: How Adani Ports Was Removed from S&P Sustainability Index, 13th April 2021, https://in.investing.com/news/timeline-how-adani-ports-was-removed-from-sp-sustainability-index-2682291 ). It is true that S&P won’t react to every report, but the pressure was building up.
  2. Can a company be scrutinized in isolation on these issues – Adani Group is one of the most successful and largest conglomerates in India. They have six listed companies whose combined market cap is more than USD 100 billion. All these companies are actively controlled and managed by the owner, Mr. Gautam Adani. He and his family members are involved in the everyday decision process and in effect, there is hardly any difference between any of these companies in terms of how they are managed operationally. The question in this case is that should the market be looking at the companies separately. It can be argued that the current situation is different from other regular business-related issues like poor quarterly results etc.
  3. Will Institutional Investors react and how will the Adani Group respond – The ESG (Environmental, Social, and Governance) space is evolving very fast and big institutional investment managers are aggressively pushing ‘Sustainability Agenda’. Will some of these Institutional Managers review their investments in APSEZ and will it impact the stock price? Furthermore, how will the Adani Group react if indeed that happens? Will they review their investments in Myanmar? More importantly, will it be a strategic retreat or will it be a conscious decision to not support the military rule.

How EMAlpha can help in some of these situations?

The rapid developments in ESG space and conflicting viewpoints on what is the best way forward for investment managers is often a confusing problem. But, the EMAlpha’s ESG offering is centred around addressing some of these very critical issues as follows;

  1. ESG is a strong driver for improvement in the investor perception. But it is the composition that makes the big difference and as such all the three parameters that make up ESG need to be evaluated separately. The EMAlpha algorithms provide separate scores for E, S and G so that an investor can review the sectoral performance more transparently.
  2. A key feature of EMAlpha’s NLP algorithms in ESG space is that the attribution analysis is fairly simple and straight forward. Investors need to be very careful in differentiating between actual improvement and progress which is balanced vs. fake and dishonest attempts like ‘greenwashing’ and disproportionate focus on one particular part in an unbalanced way.
  3. The ESG is as much about intent as it is about execution. For this balanced evaluation, having an understanding of the local factors is very crucial. A good ESG track record (probably more driven by excellent performance in E and/or S) may hide serious Governance related risks and the investors can only ignore them at their own peril. EMAlpha analysis meticulously incorporates this critical part of the ESG evaluation jigsaw puzzle.
  4. Because the local news flow collection picks up issues earlier than the English media, it is very useful to do regular analysis of social media (such as Reddit feed) and use it as an input before taking an investment decision. It is here that EMAlpha’s analysis of unstructured data becomes a much-needed tool for investors to spot these trends quickly.
  5. The local language along with English news analysis can be tracked for the companies experiencing ESG related issues. Considering the sensitivities involved, especially when institutional investors have invested in the stock, these issues could escalate quickly, thus impacting the stock price performance. The unstructured data analysis in other geographies can also be used to assess potential impact on larger companies.
  6. Predicting the behaviour of large institutional investors on the basis of their public position on certain issues can help forecast the stock price impact. This is one of the key features of EMAlpha product as it combines technology with domain expertise. The analysis provided by EMAlpha is useful in picking up the signals when the views change for institutional investors.

EMAlpha Products and Services

In most Emerging Markets, information discovery is a major challenge. For example, even if global investors do show interest, how do they solve the problem of timely access to information? The world’s largest capital allocators hold USD 60 trillion and they include GPIF (Japan), GPF (Norway), ADIA (Abu Dhabi), GIC (Singapore) etc. However, only 10% of the capital gets allocated to EMs and ~90% goes to G10. The big hurdle for EMs is: Foreign investors cannot access relevant local information in a timely fashion.

Most market participants and investors from across the world realise that the low rates in G10 makes EM attractive for investors. But, a) Information access is usually a cost and time intensive process for investors, and b) In many EMs, language is a big barrier and because of multiple regional languages, there is a significant delay before news makes it to the mainstream English language. To address these issues, you need solutions like, a) Real time news collection from multiple languages and, b) Instantaneous machine translation and text analytics leading to actionable recommendations for investors.

There are further challenges such as ensuring that companies behave responsibly and that they adopt sustainable business practices. There is a need to ensure that the investors are contributing towards making the world a better place by making investment decisions which reward responsible behaviour of companies. Case in point, ESG (Environmental, Social & Governance) which is increasingly being used as a filter for investment decisions. There are other issues as well such as which data to use and a lack of a standardized framework for evaluation.

Some of these issues are too important to be postponed to a later date and it is in this regard that EMAlpha is making its contribution. EMAlpha has developed a Flexible ESG Framework Management System which is a proprietary technology that makes ESG scores framework agnostic, thus allowing for quick adaptation. In addition, the users decide what matters to them and the EMAlpha system does a classification into E, S, G and more granular categories.

EMAlpha also has solutions for Multilingual data collection and real time targeted information which are based on proprietary processes to collect relevant data across multiple markets. The coverage expands across emerging market equity, currencies and commodities and the work has also been very successful in testing the signals in some key markets for live trading strategies. This is a continuous cycle and a virtuous loop that allows for iterative improvement through AI-human feedback.

With developments in AI and technology in areas like NLP, there are considerable new possibilities to bridge the gap in information between Emerging Markets and the more Developed Markets. This is an area which is turning out to be very exciting because some of the tools mentioned were not available even a couple of years ago. This implies that the evolution in the field will only get faster as time goes on. While the Emerging Markets and the Capital Flow Conundrum is a complex one, there is now much more hope and optimism that with the usage of technology, things will only get better.

At EMAlpha, the ESG team is doing further research on why some issues like Social get more prominence as compared to others like Environmental or Governance issues. To look at specific cases in the context of ESG is a very intense yet interesting exercise and this has been an incredible learning experience for the EMAlpha Research team. The data, information and ratings are a humongous challenge for ESG and it takes time to reach to the depth of the issues as the field is evolving very quickly.

EMAlpha is making a solid contribution in tackling these challenges. EMAlpha has solutions for ESG which are practical, user friendly and although not too simplistic yet easy to use. EMAlpha has developed a Flexible ESG Framework Management System which is a proprietary technology that makes ESG scores framework agnostic, thus allowing for quick adaptation. In addition, the users decide what matters to them and the EMAlpha system does a classification into E, S, G and more granular categories.

We strongly believe that the entire ESG ecosystem requires multiple stakeholders to pull in the right direction in order to make it operational and that will be the most critically determining factor for ESG’s success in making the corporate responsibility actually work. Most importantly, the investors should view ‘E’, ‘S’ and ‘G’ individually and should not confound issues when it comes to the comprehensive ESG evaluation. It is important to understand the right reasons behind ESG investing because this bias could hurt their investment decision making and portfolio performance.

Research Team
EM Alpha LLC

For more EMAlpha Insights on Emerging Markets, please visit https://emalpha.com/insights/. To know how you can use EMAlpha’s unstructured data and ESG (Environmental, Social and Governance) solutions for better investment decisions, please email us at research@emalpha.com.

About EMAlpha:

EMAlpha, a data analytics and investment management firm focused on making Emerging Markets (EMs) more accessible to global investors and unlocking EM investing using machines. EMAlpha’s focus is on Unstructured Data as the EMs are particularly susceptible to swings in news flow driven investor sentiment. EMAlpha works on information discovery and ESG solutions for Investors in Emerging Markets, using AI and NLP tech. Our mission is: “To help increase capital flow, in terms of FDI and FPI, to Emerging Markets by lowering information barriers using AI/NLP”. EMAlpha Products help achieve both alpha and ESG solutions and the idea is to help asset allocators, asset managers, banks and hedge funds along with companies with cost and time efficient access to relevant information. We use thoroughly researched machine learning tools to track evolving sentiment specifically towards EMs and EMAlpha pays special attention to the timely measurement of news sentiment for investors as these markets can be finicky and sentiment can be capricious. Our team members have deep expertise in research and trading in multiple Emerging Markets and EMAlpha’s collaborative approach to combining machine learning tools with a fundamental approach help us understand these markets better.

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