Greenwashing can be in 2022 word of the year as authorities in the United States and elsewhere continue to crack down on misleading environmental, social and governance, or ESG, labels on investment funds.
Gone are the days of labeling a product without disclosing what it means. On Wednesday, Asoka Woehrmann, CEO of German asset manager DWS Group (DWS.Germany), said he would step down next week over allegations of so-called greenwashing of DWS products. The term refers to the provision of misleading information suggesting that products or investments are more environmentally friendly, or “green”, than they actually are.
“If you focus on investing with an ESG orientation [it’s important] you’re looking under the hood,” says Todd Rosenbluth, Head of Research at VettaFi.
In February 2021, Woehrmann said Barrons that from that year, every new investment product launched by asset manager DWS would be an ESG fund. A month later, however, whistleblower Desiree Fixler, former sustainability chief of DWS, alleged that the company had misrepresented its ESG capabilities in its 2020 annual report. Her claims prompted the SEC and German regulator BaFin to open investigations.
News of Woehrmann’s departure comes a day after German prosecutors raided the offices of the DWS and the headquarters of its majority owner, Deutsche Bank (ticker: DB).
Margaux Day, director of policy at Accountability Counsel, says there is a “culture of impunity” when it comes to mislabeling ESG investments. “Investors who claim to make ESG investments must have accountability frameworks in place,” she says.
As ESG strategies have exploded in popularity, asset managers have rushed to add ESG funds to their offerings. Last year, 121 new sustainable funds were launched and 26 existing funds adopted a sustainable investing mandate, according to The morning star. Today, there are five times more sustainable funds in the United States than ten years ago, and three times more than five years ago.
The proliferation of ESG and sustainable funds has caught the attention of investors and regulators, who are increasingly demanding evidence to back up ESG claims.
“Once again we are learning a universal lesson in investing, which is that there is no substitute for doing your own research. Just because a fund or company claims to be sustainable, ESG-friendly, or climate-conscious doesn’t mean they are,” says Lee Reiners, executive director of Duke University’s Global Center for Financial Markets. School of Law. .
“It’s really up to each individual investor, if it’s matters that really matter to them, to do a bit of research and make sure that whatever they invest in, whether it’s of an index fund, ETF, or company, actually puts their money where their mouth is.
Last month, the SEC proposed new rules that would force fund managers to be more careful when naming their products. A fund called growth or value should keep 80% of its investments in this category under the proposals, and those that call themselves green or low-carbon should explain how they meet their environmental goals. The proposed rules come amid concerns about greenwashing among ESG funds and advisers.
The agency said ESG investing is one of the priority areas for 2022. Last year, it announcement the formation of a climate and ESG task force within the enforcement division to “proactively identify ESG-related misconduct”.
SEC investigations and enforcement actions that target investment managers’ ESG claims are intended to protect investors, says Margaret Peloso, senior sustainability partner at global law firm Vinson & Elkins.
“Investment managers need to do what they say they are going to do when it comes to ESG,” she says.
In May, BNY Mellon Investment Adviser paid the SEC $1.5 million to settle fees that the New York-based mutual fund manager distorted ESG opinions he made investments. The bank did not recognize the administrative costs.
“The SEC takes ESG and greenwashing seriously,” Jefferies said in a research report, adding that greenwashing is “one of the most relevant issues voiced by frustrated stakeholders.”
Rosenbluth says that while investors were “skeptical about whether ESG was adding value, not just to their portfolio”, the renewed focus on greenwashing “might give them pause.”
That said, he also sees an opportunity. “We could see demand slow slightly if asset managers were to scale back their outreach and marketing efforts. But there is also an opportunity here for asset managers to educate the investor base, to tell their story and highlight how focused, if any, they are on ESG.
Write to Lauren Foster at [email protected]