The big news yesterday was the allegation that German asset manager DWS had mislead investors over some of the firm’s funds ESG credentials. The joint US and German reported investigation led to a double-digit share price slide for Deutsche Bank, the owner of DWS.
This is especially bad news for the German lender as its asset management business is somewhat insulated from the ultra-low interest rate environment which in turn negatively impacts banks’ net interest margin, a key indicator of profitability.
In 2016, Deutsche Bank may have had to sell its asset management business as the US’ Department of Justice had fined the lender $14 billion in relation to the mortgage-backed securities scandal that led to the 2008-9 financial crisis. Luckily the fine was significantly reduced and the bank was able to hold on to its highly profitable business.
When the news over the ESG greenwashing broke, DWS initial response was “we do not comment on questions relating to litigation or regulatory matters”.
However, at around 8pm last night, the firm issued a statement to “firmly reject the allegations being made by a former employee. DWS will continue to remain a steadfast proponent of ESG investing as part of its fiduciary role on behalf of its clients.”
In brief, Desiree Fixler, who was sacked earlier this year from her role as global head of sustainability at DWS, alleged in an earlier report by the WSJ that misleading statements were made in DWS’s 2020 annual report, published in March, which claimed that more than half of its $900 billion assets were invested using ESG criteria.
DWS’s statement said: “We have always been clear in our reporting: At DWS, we differentiated between "ESG Integrated AuM" and "ESG AuM" (which DWS referred to as “ESG Dedicated”) when presenting the assets under management in our Annual Report 2020 and reported both classifications. As we disclosed in our Annual Report 2020 on page 90, DWS labeled strategies as “ESG Integrated” if they were actively managed and included coverage of ESG data (the overall SynRating) on more than 90% of the portfolio.”
Ms Fixler is reported to have claimed that the ESG claims were flawed in part because they used assessments provided by a range of external rating suppliers. This is where other firms may find themselves in similar difficulties. Due to a lack of a standardised set of ESG reporting across the board, firms can pick and choose which provider they want. The EU is attempting to address this through a variety of regulatory measures including its Taxonomy initiative and SFDR which came in recently.
Until there is one standardised ESG compliance rulebook, firms making bold claims over their products green credentials could also find themselves in hot water, especially, as was the case with Ms Fixler, an employment dispute erupts and an aggrieved party wants to upset the apple cart.
The claims of greenwashing may continue due simply to the huge amount of assets that are now classed as ESG. According to data from Morningstar, ESG AUM has more than doubled in a year, hitting $2.4 trillion by June this year.
