Overhyped green status is no longer a risk-free sales tool

Asset managers’ ESG claims will now be more closely scrutinised following DWS allegations

August 2021 was a watershed month for environmental, social and governance (ESG) investing.

We’ve grown familiar with the unceasing commitments and press releases from asset managers lauding their own achievements and goals on sustainability.

For a long time, there didn’t appear to be much reputational risk for asset managers overhyping their own credentials on sustainable objectives to remain relevant for an increasingly eco-conscious institutional and retail investor audience.

There has always been scepticism behind these claims, with warnings of greenwashing from some commentators, but hardly any asset managers have really been stung by their own claims of green status. August marked a change on that score.

In an article published in the Wall Street Journal on August 1, DWS was accused by Desiree Fixler, its former chief sustainability officer, of overstating the group’s ESG claims.

She had taken issue with claims the Frankfurt-based asset manager had made in its 2020 annual report that €459 billion ($543 billion) – more than half of its assets under management – had had ESG criteria factored into investment decisions. DWS also claimed ESG was “at the heart of everything that we do”.

For a long time, there didn’t appear to be much reputational risk for asset managers overhyping their own credentials on sustainable objectives

The former chief sustainability officer had delivered a damning presentation to the executive board before the annual report was published, stating, among other things, that DWS had no clear ambition or strategy and that ESG teams weren’t an integral part of decision-making.

DWS published a rebuttal on August 26, stating that absolute numbers are transparently listed within its annual report.

During the same month, Risk.net published an article on August 18 highlighting the questionable labelling of a group of oil-ridden equity funds that had been classified as promoting environmental or social characteristics. This status is self-conferred under Article 8 of the European Union’s Sustainable Finance Disclosure Regulation (SFDR), and widely referred to as ‘light green’ in the industry.

Of the 798 Article 8 funds reviewed by Risk.net, NN Investment Partners had the fund with the highest proportion of oil stocks, with just over 91% of its NN Energy fund invested in oil majors such as ExxonMobil and Chevron. NN Investment Partners declined to comment on why the fund was considered Article 8.

Article 8 status within SFDR is self-certified by asset managers for their funds. Although legislators have been insistent that they do not want the status to be viewed as a label, many in the market do treat it as such. Distributors and clients are known to look for funds classified under SFDR as Article 8 or the ‘dark green’ Article 9 funds that purely make sustainable investments.

A few days after the Risk.net investigation was released, Reuters published an article following its own analysis of 20 asset managers’ funds highlighting one of Legal & General Investment Management’s Article 8 exchange-traded funds – L&G UK equity Ucits ETF – that included a number of ‘sin stocks’, such as oil giants BP and Royal Dutch Shell, and British American Tobacco.

L&G told Reuters the fund was considered Article 8 because it promoted sustainability characteristics by applying LGIM’s Future World Protection List, which was a binding element of the investment process.

The growing scrutiny by financial journalists on these ESG claims is likely to turn a regulatory spotlight on the asset managers, as well. The US’s Securities and Exchange Commission and Department of Justice have launched investigations into the DWS allegations, along with German financial watchdog Bafin.

The open question is how asset managers will react. ESG status remains a powerful sales tool that firms will want to retain. But it needs to be backed up with a credible decision-making process for portfolio managers, not just some slick marketing literature.