DWS probes raise fears of greenwashing allegations in investment industry

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Asset managers fear that exaggerated claims about sustainability-focused investing could turn into an industry-wide sell-out scandal after regulators on both sides of the Atlantic focused more on environmental investments, social and governance issues in the German DWS.

Investigations by regulators in Germany and the United States, triggered by allegations by former DWS global sustainability manager, have placed greenwashing – unwarranted allegations about environmental practices – at the center of European industry of investment.

Rival fund houses are now worried about coming under scrutiny for sustainability claims, which are difficult to measure and vary widely from fund to fund.

“The definition of what ESG or responsible investment really is has been debated since its creation,” said Sébastien Thevoux-Chabuel, portfolio manager at Comgest. “[What] what happened to DWS could happen to almost any investor.

Desiree Fixler, who was sacked earlier this year from her role as global head of sustainability at DWS, alleged that the German asset manager made misleading statements in its 2020 annual report, where he claimed that more than the half of its $ 900 billion in assets had been invested using ESG Criteria.

Last week, DWS defended the way it portrayed its numbers, saying it was always clear it distinguished between so-called ‘ESG-embedded’ assets, where sustainability issues were seen as part of the process. broader investment of traditional funds, and ESG assets, which are specialized products with a mandate to focus on sustainable investing.

BaFin, the German financial regulator, and US officials have opened investigations into the matter.

Asset managers have demonstrated their credentials in terms of sustainable development in recent years in the face of strong demand for ESG investments. Total sustainable fund assets reached $ 2.24 billion at the end of June, up from less than $ 1 billion at the end of the first quarter of 2020, according to Morningstar, the data provider, as investors sought investments that made good for the climate and society while generating returns.

But Catherine Howarth, chief executive of ShareAction, the responsible investment charity, said asset managers’ credibility on ESG investing “needs to be tested to the nth degree.”

“I don’t think DWS is the worst there is,” she said. “If DWS has this problem, then a lot of other asset managers have this problem. I don’t think they were an outlier or a total outcast out there – many more [asset managers] were doing something similar.

Claims about sustainability differ enormously between asset managers and their clients. Some asset managers shy away from fossil fuel stocks altogether, for example, while others believe it is best to invest in oil stocks and use that as a way to put pressure on investment boards. administration – an approach that may surprise some of their clients. Some fund managers buy bonds that impose a penalty on borrowers if they don’t meet green targets; others see it as a reward for failure.

Data providers who score companies on sustainability metrics also generate different results. “The quality of the data is really bad,” said an industry executive familiar with DWS’s work in this area. “It’s like trying to invest with data from the 80s.”

Last year, several investment firms blamed bad ESG data after it came under heavy criticism for including Boohoo in many sustainable funds, despite accusations of poor labor practices at the factories that make its clothing.

A survey released last year by BlackRock of 425 investors, together representing $ 25 billion in assets under management, found that poor quality or availability of ESG data and analysis is the biggest barrier to investing. sustainable.

Additionally, most of the major asset managers claim to incorporate ESG into all of their investments. Again, however, this is ill-defined. In one asset manager, integration might mean that portfolio managers need to consider a company’s ESG score before buying a stock, while in another they might be excluded from buying certain. actions.

“The integration differs depending on the asset manager. Greenwashing kicks in if they do something different than what they say they do, ”said an ESG specialist at a global asset management company.

“My biggest fear is waking up in the morning to find that we have been accused of greenwashing. This is the next bad-selling scandal, ”he said, adding that the growing popularity of sustainable investing meant that“ something like this was always going to happen ”.

In July, the Financial Conduct Authority, the British regulator, wrote to all asset managers to highlight concerns about requests to launch new ESG or sustainability-focused funds, warning that these “often contain claims that do not stand up to scrutiny.”

Other regulators are also paying more attention to ESG investments. New European rules, which entered into force in March, aim to put an end to greenwashing. The EU’s Sustainable Finance Disclosure Regulation has imposed 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 the demands that asset management companies will be forced to meet when creating sustainable funds for retail investors.

All of this suggests that regulatory investigations into the DWS are unlikely to be ad hoc.

“There seems to be a more positive discourse on ESG and a little less delivery in practice by many fund managers,” said one specialist working in the investment industry.

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