Originally published in ESG Investor on February 9, 2023
Since activist short-seller Hindenburg Research accused the Adani Group of “pulling the largest con in corporate history” on 25 January, the value of the world’s biggest private developer of new coal has been in free fall. The exposure of Adani’s fraud sheds an embarrassing light on organisations – including Lloyd’s of London, Allianz and TIAA – which have been enabling the Adani Group’s businesses as risk managers or investors, despite net zero commitments.
In their report, Hindenburg Research details “brazen accounting fraud, stock manipulation and money laundering”. As part of the allegations, the short-seller documented transactions which allowed Adani to hide large losses in the value of its massive Carmichael coal mine in Australia. Since the report was published, the value of the Adani Group has plummeted by more than US$100 billion.
For many years, campaign groups have warned that Adani is not only wrecking the climate by developing one of the world’s largest coal mines, but is engaged in a long list of environmental breaches, other crimes and manipulations to inflate the value of its assets.
Under pressure from the Stop Adani campaign, well over 100 companies, including 45 insurers have ruled out getting involved in the Adani Group’s Carmichael coal mine. “The reputational risks inherent in the Carmichael project are grave and many of the major financiers rightly recognize this and have stepped away from the project”, British insurer Aviva commented as early as 2015.
In contrast, some insurance companies decided to lend their support. According to information received by Market Forces, the Lloyd’s insurer Probitas 1492 is underwriting the Carmichael coal mine. Specifically, Probitas has been named as an insurer of the railway line, haulage operation and port of the coal project. Several other Lloyd’s underwriters insured Carmichael in the past but dropped the project under pressure. Berkshire Hathaway, Korean Re, the Markel Corporation, WR Berkley and other insurers have meanwhile not ruled out underwriting the risks of the Carmichael project.
Probitas, whose name ironically means Honesty in Latin, has not denied the allegations about its involvement in the Carmichael coal mine. The insurer should be aware that companies with a track record of breaching regulations and defrauding investors pose a significant risk of cutting corners also when it comes to safety.
Some insurance companies have chosen to throw in their lot with Adani enterprises as large institutional investors against all warnings. Based on Bloomberg data, TIAA (including its subsidiary Nuveen) holds about 4.7% and Allianz (primarily through its subsidiary PIMCO) about 3.8% of all the Adani bonds which have been publicly disclosed. This makes them the second and third biggest investors in Adani bonds, respectively.
“Unacceptably high risk”
In March 2022, PIMCO ruled out investments in further bonds of Adani Ports because of their link to the Carmichael coal mine. Yet because the Adani enterprises are so intricately linked, this is not sufficient. As Norway’s largest pension fund KLP recently warned, “revelations about Adani’s corporate structure created an unacceptably high risk that ‘clean’ investment could be siphoned off towards coal mining”.
Allianz, which chairs the Net Zero Asset Owner Alliance, has argued that PIMCO retains some autonomy and takes its own investment decisions. Yet the German insurer is ultimately responsible for the investments of its subsidiary and needs to ensure that PIMCO follows its environmental policies.
Under a net zero pathway, coal emissions need to decrease by 79% between 2019 and 2030. Financing and underwriting the risks of the world’s biggest private coal developer inherently contradict the net zero commitments which Allianz, Lloyd’s and TIAA have all made.
Like in the case of the energy giant Enron, which collapsed in 2001, the Adani experience also demonstrates that climate destruction, human rights abuses and fraudulent behaviour often go hand in hand. Insurers as well as investors have a self-interest in listening to the warnings of campaign groups.
In 2023, the Adani Group intends to raise approximately US$10 billion in debt and will need to renew the insurance policies for the Carmichael project. Probitas and other insurers must rule out underwriting the risks of the Adani coal mine. Likewise TIAA, Allianz and all other institutional investors must make it clear that they will not invest in any further debt of the Adani Group and its enterprises.