European asset managers are reviewing their ESG labeling and marketing claims following news of probes into the investing arm of Deutsche Bank AG, according to people close to the process.
Anxiety around greenwashing — mis-stating how climate friendly assets are — is palpable across the industry as fund managers react to German and U.S. investigations of DWS Group. Though the Deutsche Bank unit says it did nothing wrong, the development has led to a moment of reckoning as fund managers wake up to a new regulatory era in which once fluffy environmental, social and governance definitions are no longer tolerated.
Since learning of the DWS probes, investment firms across Europe have been trying to establish whether they’ll need to reclassify assets previously identified as ESG, according to regulators and several executives at money managers. The people spoke on condition of anonymity as the process isn’t public.
One major European fund manager created an internal taskforce to review ESG procedures and products as a direct consequence of the DWS probes, one of the people said. Managers are checking older marketing material to make sure it doesn’t contain misleading language, while firms are reconsidering the words they use in public when declaring their dedication to ESG and sustainability, another person said.
Meanwhile, cash continues to flood the market for climate-friendly investments amid growing unease at the pace of global warming. ESG-focused exchange-traded funds have attracted net inflows every week for the past year, and Bloomberg Intelligence estimates that ESG assets will balloon to more than $50 trillion by 2025, making up well over a third of the total market.
Stricter European regulations have already forced the finance industry to abandon some of its ESG claims. Between 2018 and 2020, the label was stripped off about $2 trillion of assets, suggesting that other regions might be facing a similar correction once regulations catch up.
In the U.S., the Securities and Exchange Commission has made clear it intends to crack down on inflated ESG statements. On Wednesday, SEC Chairman Gary Gensler said he’s ordered staff to review funds’ language around climate and socially friendly investing.
“Many funds these days brand themselves as ‘green,‘ ‘sustainable,’ ‘low carbon,’ and so on,” Gensler said, according to the text of a speech delivered to the European Parliament Committee on Economic and Monetary Affairs. “I’ve directed staff to review current practices and consider recommendations about whether fund managers should disclose the criteria and underlying data they use to market themselves as such.”
The investigations into DWS followed allegations by its former head of sustainability, Desiree Fixler, who said the firm had inflated its ESG assets. Fixler, who was hired last September as DWS’s first ever sustainability head, was fired in March, just one day before the firm published its full-year results.
Fixler says DWS’s management “knew many portfolio managers weren’t complying with their ESG integration policy.” The reasons varied “from disbelief in ESG to distrust of the ESG Engine,” the firm’s proprietary ESG analysis software tool, because its data was “too backward looking,” she said in an interview.
A DWS spokesman declined to comment, “beyond our previous statement that we firmly reject the unfounded allegations being made by a former employee.”
But the allegations represent a setback for DWS Chief Executive Officer Asoka Woehrmann and his boss, Deutsche Bank CEO Christian Sewing. Both have been keen to tout their firms’ ESG credentials as a way to win business in what’s become a highly lucrative market. And both executives have repeatedly declared their commitment to ESG at conferences, investor events and in interviews.
Fixler says she was dismissed after questioning DWS’s labeling of ESG products. The firm reported 459 billion euros ($545 billion) of “total integrated ESG assets” at the end of 2020, compared with the roughly 94 billion euros that it reported as ESG “dedicated” assets. By the second quarter, DWS said it had just over 70 billion euros in ESG assets, and a further 16.4 billion euros of “illiquid green-labeled single assets in non-ESG classified products,” after applying its “revised ESG product classification approach.” It didn’t report an “integrated” ESG figure.
DWS says it stands by its annual report disclosures and has rejected Fixler’s claims. The firm will “remain a steadfast proponent of ESG investing as part of its fiduciary role on behalf of its clients,” it said last Thursday.
In March, the European Union enforced the Sustainable Finance Disclosure Regulation, which is intended to function as an anti-greenwashing rulebook. SFDR has already forced a massive shift in ESG labeling. But the DWS investigations appear to have shocked the industry into more urgent action as it dawns on managers that false ESG claims may trigger an aggressive regulatory response.
Daan van Acker, a data analyst at nonprofit InfluenceMap, said it’s clear stricter regulations are needed around ESG to prevent a loss of confidence in the label. It’s a field that still needs “more clarity and consistency for investors,” he said. “That is the end goal we want to see here.”
— By Steven Arons, Frances Schwartzkopff and Nicholas Comfort (Bloomberg Mercury)