S&P Dow Jones Indices will remove Adani Enterprises from its sustainability indices. What does this mean?

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S&P Dow Jones Indices announced on Thursday (February 2) that it would remove Adani Enterprises, the flagship company of the Adani Group, from its widely used sustainability indices with effect from February 7. “Adani Enterprises (XBOM: 512599) will be removed from the Dow Jones Sustainability Indices following a Media & Stakeholder Analysis triggered by allegations of stock manipulation and accounting fraud,” the announcement said.

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Adani removed from S&P Dow Jones Indices: what this means

According to the S&P Dow Jones Sustainability World Index website, the index comprises global sustainability leaders as identified by S&P Global through its Corporate Sustainability Assessment (CSA). It represents the top 10% of the largest 2,500 companies in the S&P Global Broad Market Index (BMI) based on long-term economic, environmental and social criteria.

The removal of Adani Enterprises from the index will essentially have the effect of making its shares less appealing to environment-conscious investors, Reuters reported.

The announcement by S&P Dow Jones Indices came as the market rout of Adani group stocks continued to widen and deepen on Friday (February 3). Stocks of Adani Enterprises Ltd hit their 15 per cent lower circuit on the announcement. The NSE had placed Adani Enterprises, along with Adani Ports & SEZ and Abuja Cements under the additional surveillance measures (ASM) framework on February 2, which means trading in their shares now requires a 100% margin in order to curb speculation and short selling.

In essence, an ASM shortlisting signals to investors that the stocks have seen unusual activity.

The seven listed Adani Group companies now have a market capitalisation of $102 billion, less than half the $217 billion before the Hindenburg Research report came out, Reuters reported on Friday.

Also Read |Adani rout erases half of group value since Hindenburg Report

What is the CSA?

The CSA, established in 1999, underlies the S&P Dow Jones sustainability index. It is now also the basis for many other ESG indices.

According to the S&P Global website, S&P acquired the CSA in 2019, which included the transition of the related ESG ratings and ESG benchmarking teams that now operate out of S&P Global Switzerland.

According to the website, companies are selected for inclusion in the Dow Jones Sustainability Indices, the S&P 500 ESG, and several other sustainability indices in part based on their results in the S&P Global CSA. A growing number of companies participate in the assessment and use their results to benchmark their sustainability performance vis-a-vis peers.

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S&P says the CSA applies a best-in-class approach, meaning no industries are excluded from the assessment. The CSA compares companies across 61 industries via questionnaires assessing a mix of 80-100 cross-industry and industry-specific questions. On the basis of their performance, companies receive scores ranging from 0 to 100 and percentile rankings for approximately 20 financially relevant sustainability criteria across economic, environmental and social dimensions, according to the S&P website.

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And what is ESG?

ESG stands for Environment, Social responsibility, and (Corporate) Governance, which have over the last few years emerged as key themes for investors everywhere, including in India. The asset size of ESG funds — which incorporate environment, social responsibility and corporate governance in their investing process — have ballooned in India, and in 2021, the NSE launched NSE Prime, a framework that allows companies to submit to standards of corporate governance that are higher than those required by existing regulations.

Market experts say investors in funds and companies would do well to keep the factors of environmental sustainability, social responsibility, and corporate governance in mind for long-term sustainability of investment returns. However, some are sceptical of the possibility of “greenwashing”, and of fund managers over-weighing certain stocks once other options are deemed non-compliant with ESG investment parameters.

Nimesh Shah, MD & CEO, ICICI Prudential AMC, had told The Indian Express in 2020: “In the coming years, the ESG way of investing will be the new normal in India. Most of the millennial and young population in India are more conscious while making investment decisions. The majority of studies highlight that companies with good ESG scores tick most of the checkboxes for investing, tend to mitigate environmental and social risks, and tend to have stronger cash flows, lower borrowing costs. and durable returns.”