The days when selling ESG funds was an easy marketing ploy for fund managers are over.
Investing based on environmental, social, and governance criteria is a hugely popular new market for full-service asset managers struggling to compete with low-fee tracker funds. While this type of ethical investing can actually mean different things to different people, scrutiny of the environmental part of the claims is growing.
On Wednesday, Asoka Woehrmann, chief executive officer of DWS, Deutsche Bank’s minority-listed asset management subsidiary, said he would resign following the upcoming annual general meeting. The news comes a day after German authorities raided the offices of both companies amid allegations that the DWS made false statements about ESG funds. The U.S. Securities and Exchange Commission and federal prosecutors also Exploration in progress.
Investing in ESG has benefited the industry. Fund managers often promise investors higher returns while still doing well with their money. However, ESG is a slick concept, without widely accepted definitions, criteria, and metrics. Notoriously, a company’s ESG rating can very different among trusted rating agencies.
That variance is not unreasonable. There are many ways to combine the three criteria into a single score, and for any given criterion there can be an honest disagreement about what good or bad actually looks like. For example, a number may rank
rated “E” high because it plans to decarbonize its business, or poorly because it sells oil and plans to sell natural gas for many years.
However, the range of variance in environmental ratings is beginning to narrow. European officials have set new rules for various sustainable investments and is working on definitions of what is green and not green. SEC is also working on its own set of rules. While standards increase the compliance burden on fund managers, they should also help ensure investors are getting what they were promised, rather than just a lot of hot air.
Concern about greening – where there are practically no claims of green – is widespread and recent events are only fanning the flames. The SEC recently fined
$1.5 million for misleading statements about ESG funds. DWS reported “ESG assets” in its most recent annual report to be much lower than “ESG-integrated” assets in the previous year. Last year, a whistleblower alleged that its disclosure was misleading. It will now be up to a new boss to draw a thicker line on the incident.
A speech last month titled “Why Investors Shouldn’t Worry About Climate Risks” from the Chief Responsible Investment Officer at HSBC’s Wealth Management branch, in which he argued that The financial impact of climate change will be “mitigated,” only reinforcing concerns that insider thinking is often inappropriate for marketing. The bank’s executives were quick to stay away The employee is currently suspended comment.
The continued decline at DWS is a warning to other asset managers to step up or downsize green claims. More broadly, stricter rules about what qualifies as eco-friendly, even if social and governance criteria are still not clearly defined, could mean that the time has come. remove “E” from ESG investment – if not eliminate grouping altogether. It never helped investors, and now it’s not of much use to fund managers either.
Write letter for Rochelle Toplensky at [email protected]
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