by Nawar Alsaadi.
Reported allegations against DWS Group could be a tipping point.
The way investors react to a given piece of news can be more telling than the news itself. This of course doesn’t mean that investors always get it right, but a share price move of a large magnitude in a short period of time is often a signal of a major shift. The 12% decline in shares of Germany-based asset manager DWS Group, after it became subject to a greenwashing probe by the U.S. Securities and Exchange Commission and federal prosecutors, signals a potential tipping point for greenwashing and false sustainability purveyors. (NEI Global High Yield Bond Fund held a 0.73% weight in high yield bonds issued by Deutsche Bank as of July 31, 2021. We continue to monitor the reported allegations against DWS Group.)
The probe was revealed by the Wall Street Journal on August 26. It focuses on claims that DWS Group, which is majority-owned by Deutsche Bank, has overstated its sustainable investing efforts and is alleged to have painted a “rosier-than-reality” picture to its investors. This probe is the most high-profile action taken by the SEC’s newly created Enforcement Task Force on Climate and ESG Issues. Upon the creation of the task force earlier this year, then-acting chair Allison Herren Lee indicated that “climate risks and sustainability are critical issues for the investing public and our capital markets.”
Current SEC chair Gary Gensler declared in July the commission is assessing new rules on disclosure for sustainable fund managers. The SEC’s seemingly relentless offensive on greenwashing appears justified in light of the Swiss Finance Institute findings (published June 2021) indicating that U.S.-based sustainable asset managers’ behavior signals a degree of greenwashing (“signatories” below refers to signatories to the Principles for Responsible Investment, or “PRI”):
We do not find better scores for U.S.-domiciled signatories, not even for those that report full ESG incorporation. U.S.-domiciled signatories that report no ESG incorporation actually have, on average, worse scores than non-PRI investors. These latter findings are consistent with “greenwashing” signatories seeking to attract responsible flows. In general, the ESG disconnect between the U.S. and the rest of the world appears to be driven by a more business-oriented approach to ESG, as opposed to ESG investing that is intrinsically motivated by social norms more prevalent in other parts of the world.
In this context, stricter regulation and enforcement around sustainability claims in the U.S. asset management space is highly welcome. It is worth noting that increased regulatory scrutiny around ESG funds’ sustainable claims is not just a U.S. phenomenon. Both the Ontario Securities Commission and British Columbia Securities Commission have been reviewing Canadian fund managers’ ESG activities to ensure that what they’ve stated in their marketing materials matches what’s in their portfolios. The same exercise is taking place in Australia and Europe, where the battle against greenwashing has been raging for some time. Besides the obvious moral implications, greenwashing introduces 4 distinct threats to investors and society at large:
- Greenwashing can undermine the fight against climate change and other key sustainability challenges by siphoning capital away from credible sustainable funds
- Greenwashing can undermine the credibility of ESG/sustainable investing as investors become disillusioned with the industry
- Greenwashing can lead to complacency by creating an impression that investors are allocating sufficient capital to address the world’s sustainability challenges
- Greenwashing can taint sustainable investing financial performance by allocating capital to underperforming funds
If the latest IPCC report on climate change is any indication, the world cannot afford to waste time on false sustainability claims and bogus climate change fight bravado. Investors have a critical role to play in addressing the world’s sustainability challenges and holding companies accountable. This role cannot be played if sustainability commitments are in question. The fact that investors have reacted with such swiftness and severity to the reported greenwashing probe against DWS Group sends a clear and unmistakable message to the asset management industry: When it comes to greenwashing, regulators mean business.