Sat. Oct 23rd, 2021

ESG Investment Updates

Asset executives fear exaggerated investments over sustainability-focused investments could become a resale scandal across the industry after regulators on both sides of the Atlantic sharpened their focus on environmental, social and managerial investments at German DWS has.

Investigations by regulators in Germany and the US, caused by allegations by the former head of sustainability at DWS, green wax – unjustified allegations of environmental practices – central to European investment industry.

Competitive fund houses now fear that they may also come under scrutiny over allegations of sustainability, which are difficult to measure and differ greatly from one fund to the next.

“The definition of what ESG or responsible investing really is has been discussed since it was created,” says Sébastien Thevoux-Chabuel, a portfolio manager at Comgest. “[What] with DWS, it can happen to almost any investor. ”

Desiree Fixler, who was fired from her role as global head of sustainability at DWS earlier this year, claims that the German asset manager made misleading statements in his 2020 annual report, claiming that more than half of his $ 900 billion in assets invested are ESG criteria.

DWS defended last week how it represents its numbers, saying it is always clear that it distinguishes between so-called “ESG integrated” assets, where sustainability issues are seen as part of the broader investment process for mainstream funds, and ESG assets, which specialize in products with the mandate to focus on sustainable investment.

Both BaFin, the German financial regulator, and US officials have investigated the matter.

Asset managers have been demonstrating their sustainability evidence over the past few years due to the high demand for ESG investments. The total assets in sustainable funds reach $ 2.24 tons at the end of June, at less than $ 1 tons at the end of the first quarter of 2020, according to Morningstar, the data provider, while investors seek investments that are good for the climate and society as well as to generate returns.

But Catherine Howarth, chief executive of ShareAction, the charity for responsible investing, said asset managers’ credibility over ESG investments “needs to be tested to the third degree”.

“I do not think DWS is the worst there is,” she said. ‘If DWS has this problem, many other asset managers have this problem. I do not think they were a standout or a total pariah – many others [asset managers] did something similar. ”

Sustainability claims differ widely between asset managers and their clients. For example, some asset managers completely avoid stocks related to fossil fuels, while others believe it is better to invest in oily stocks and use them to put pressure on the boards of companies — an approach that may surprise some of their customers. Some fund managers buy bonds that impose a fine on borrowers if they do not reach green targets; others see it as a reward for failure.

Data providers that rate businesses according to sustainability methods also deliver different results. “Data quality is very poor,” said an operations manager familiar with DWS’s work in this space. “It’s like trying to invest with data from the 1980s.”

Several investment houses blamed the poor ESG data last year after receiving strong criticism over the inclusion of Boohoo in many sustainable funds, despite accusations of poor work practices in clothing factories.

A survey published by BlackRock last year among 425 investors, which together represent $ 25 tons of assets under management, found that poor quality or the availability of ESG data and analysis is the biggest obstacle to sustainable investment.

Sustainable Sustainability Reporting Challenge Card showing poor data quality is one of the biggest obstacles to ESG investments

In addition, most large asset managers claim that ESG is integrated into all of their investments. Again, however, it is poorly defined. With one asset manager, integration can mean that portfolio managers have to consider a company’s ESG score before buying a stock, while at another they can be excluded from buying certain stocks.

“Integration differs by asset manager. The greenwash comes in when they do something different from what they say they do, ”said one ESG specialist at a global asset management company.

‘My biggest fear is waking up in the morning to find out that we are being accused of being green. This is the next resale scandal, “he said, adding that the growing popularity of sustainable investments means that” something like this will always happen “.

In July, the Financial Conduct Authority, the UK regulator, wrote to all asset managers to highlight concerns about applications to launch new funds with an ESG or sustainability focus, and warns that they ‘often contain claims that are not investigated’.

Other regulators are also raising awareness of ESG investments. New European rules, which came into force in March, is designed to wash green. The EU Regulation on the Disclosure of Sustainable Finance imposes new ESG reporting requirements on asset managers and other financial market participants.

BaFin, the German financial regulator, has also launched a consultation with the aim of tightening up the requirements that asset management companies must meet when setting up sustainable funds for retail investors.

All of this suggests that regulatory investigations into DWS are unlikely to be one-off.

“There seems to be more positive talk about ESG and a little less delivery by many fund managers,” said an investment industry specialist.

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