ESG developments this week
In Washington, DC and around the world
Regulatory review of ESG-related sustainability claims will be intensified
As mentioned in last week’s newsletter, the SEC is investigating DWS (Deutsche Bank’s asset management division) for alleged ESG-related fraud–Claims that DWS rejects. Many ESG watchers believe the DWS investigation marks the beginning of a larger SEC crackdown on potentially fraudulent ESG promises. For example, on September 1, Bloomberg Green found the following:
“There is growing pressure on ESG-labeled mutual fund managers to show that they are honest with their clients about what they are selling.
The heat got really turned up last week when the U.S. Securities and Exchange Commission and BaFin, Germany’s financial regulator, launched an investigation into allegations that the DWS Group’s asset management arm of Deutsche Bank AG was the environmental and possibly social information of some of its own ESG-labeled investment products. Regulators have signaled that the review is in its early stages and DWS has denied claims that it overvalued ESG assets.
Since then, researchers have raised questions about the credentials of asset managers who claim they are marketing funds designed to fight the climate crisis and social injustice.
A London-based nonprofit called InfluenceMap said more than half of climate-related funds are failing the goals of the Paris Agreement.
InfluenceMap found that 55% of funds marketed as low-carbon, fossil-free, and green energy have exaggerated their environmental claims, and more than 70% of funds that promise ESG goals have failed.
The SEC set up a task force in March to investigate potential misconduct related to corporate sustainability claims. Gary Gensler, who took over the agency in April, said his staff are working on a rule to encourage climate disclosure by equity issuers and that the regulator will continue to focus on ESG issues. “
On Sept. 3, Bloomberg’s market intelligence division reported that wealth management companies didn’t have to wait long to learn whether the DWS was a one-off investigation or the start of a trend by the federal government:
“US regulators have long said they have doubts about the green and socially conscious labels Wall Street is putting on $ 35 trillion in so-called sustainable assets. Now the guard dogs are looking for evidence that they are right.
For several months now, the Securities and Exchange Commission’s auditors have been calling for asset managers to explain the standards they use to classify funds as environmental, social and governance-minded, people familiar with the matter said. The review is the second by the SEC to investigate possible ESG mislabeling since last year. It shows that the issue is a priority for the agency and a reason for the industry to worry about rushed enforcement actions.
SEC Pursues the Money: Few companies are booming in high finance like sustainable investing as governments, retirement plans, and corporations all seek to lower their carbon footprint and be better citizens. In the midst of the dollar rush, more and more ESG insiders have started to raise the alarm that much of the marketing is hype, a term known in the industry as greenwashing.
Letters sent by the SEC earlier this year highlight some of the agency’s top concerns, said those who asked not to be named because the correspondence is not public.
Investment advisors were asked to detail the screening processes they use to ensure assets are worthy of the ESG award, one of the people said. The SEC also wants to know how companies deal with the requirements of different jurisdictions. For example, Europe has specific standards that money managers must adhere to to ensure that assets are green or sustainable. But it’s much darker in the US.
Another SEC request sought information about ESG compliance programs, policies and procedures, another person said. The SEC also asked for statements from managers in their marketing materials or regulatory filings.
The SEC has shown its interest in bringing cases and in March created a task force of enforcement attorneys focused on fund managers’ ESG disclosures. ”
Both stories followed an August 26 article published by MarketWatch (a financial news site run by Dow Jones & Company) that also suggested that the DWS matter would be the start of something longer:
“This is the first of many to come,” Amy Lynch, a former SEC regulator and president of FrontLine Compliance, told MarketWatch. “The SEC informed the industry that this is an area they are investigating over the last year. You gave every warning. “…
Under the chairmanship of Gary Gensler, the SEC has made it a top priority to regulate what publicly traded companies are required to disclose about risks related to climate change and the environment, new information about their human resources policies, and other policies that have an impact on social issues.
At the same time, it has telegraphed its intention to hold investment managers accountable for clearly disclosing the principles they apply in developing sustainable mutual funds.
“When it comes to sustainability-related investing, there is currently a wide range of what asset managers understand by certain terms and what criteria they use,” Gensler said in a speech last month. “I think investors should be able to drill down to see what’s under the hood of these funds.”
Now in the UK
On September 5, London newspaper Mail on Sunday reported that British Prime Minister Boris Johnson had decided to take Tariq Fancy’s advice to make climate change financial a government issue while sticking to the idea of investing Can have power a more sustainable economy. Fancy is a former CIO of sustainability at BlackRock who has spoken publicly about his belief that, in his view, investing in ESG is at best what he calls a dangerous distraction. The paper reported:
“Boris Johnson will be meeting with pension and insurance bosses on Downing Street next month to work out plans to channel billions of pounds into pension funds into ‘green’ projects.
A source said there will be in-depth discussions on how pension funds can be diverted into initiatives such as installing solar panels in homes and providing charging points for electric cars.
There is more than £ 1 trillion in defined contribution pensions – including occupational schemes.
The government hopes to release more of this to invest in Britain’s green economy and “better rebuild” the initiative. Pensions and defined benefit schemes account for an additional £ 2 trillion.
The agenda is expected to provide more detail on how pension funds will be channeled into various projects to achieve “net zero carbon” by 2050 – the commitment to reduce greenhouse gases to offset carbon emissions to combat climate change.
Sources said the Association of British Insurers trade union is meeting separately with City Secretary John Glen this week to discuss the new move.
A source said, “This requires a plan, and the government is probably best suited to it because you need a supply chain that includes investment and the people to get projects done. It is necessary to coordinate and get the right types of projects going. ‘
However, the plans are expected to create controversy as many of these investments are illiquid – that is, they are difficult to buy and sell – which could result in retirement savers trapping some of their cash in assets. “
In the spotlight
Wages before sustainability?
For much of its history, ESG has been almost synonymous with what its proponents often refer to as sustainable investing. However, according to a recent study by Cerulli Associates, a Boston-based American asset management research firm, wealthy American retail investors, when identifying the factors that most influence their investment decisions, prefer companies that they believe pay fair wages , towards companies that are very environmentally conscious. It’s not that they don’t appreciate being environmentally friendly, the study found. It’s just that they value what they see as fair treatment of workers more:
“While the majority (53%) of wealthy respondents say it is important to them to invest in a green company, 65% of respondents prefer investing in companies that pay their workers a fair / living wage. “This result underscores one of the greatest challenges in promoting ESG or sustainable investment products,” says Smith. “With these offers, investors and advisors stick to the ‘E’ and rarely think of ‘S’ or ‘G’.” Particularly noteworthy in these results are the respondents in the three oldest cohorts showing 16 to 25 percentage points more interest than theirs entire ESG interest. “