Europe

Tougher Enforcement, Regulation on ESG Funds a “Wake-up Call” – Fixler

DWS whistle-blower welcomes enforcement action as necessary to deal with greenwashing.

Regulatory efforts to prevent greenwashing by asset managers must be underpinned by stronger enforcement action, according to Desiree Fixler, ex-Group Sustainability Officer at German asset manager and whistle-blower on ESG-related failings at the firm.

“One of the best and most effective ways to keep bankers or Wall Street practitioners honest is through enforcement actions,” said Fixler.

“The recent regulatory and enforcement actions in the US and in Germany are the game-changer here. This is what it really takes, even more than the Sustainable Finance Disclosures Regulation (SFDR), to clean up this market.”

Ex-CEO Asoka Woehrmann, who terminated Fixler’s employment, resigned from DWS last month following a raid by German police on both DWS’ and Deutsche Bank’s Frankfurt offices over claims of greenwashing. German prosecutors said the raid was “triggered by reports in the international and national media that DWS, when marketing so-called ‘green financial products’ had sold these financial products as ‘greener’ or ‘more sustainable’ than they actually were”.

The US Securities and Exchange Commission (SEC) launched an investigation last August after Fixler claimed DWS’ 2020 report had misled investors by claiming that more than half of the group’s US$900 billion in assets were invested using ESG criteria, noting that there was no tracking system in place that could accurately calculate the proportion of ESG integrated assets. Fixler also raised concerns over the rigour of the firm’s process for integrating ESG ratings into investment decisions.

“This is the wake-up call for every ESG practitioner to substantiate their ESG claims. ESG statements and products have to be backed by substance, they have to be backed by action and, most crucially, data,” said Fixler.

“Had this crackdown and today’s scepticism and cynicism been around two years ago, DWS would never have greenwashed. [Woehrmann] would have thought twice about what he was doing”.

Fixer was speaking in a recorded interview conducted by Robert Eccles, Visiting Professor of Management Practice at Oxford University’s Said Business School, broadcast at City & Financial’s ‘Redefining ESG Best Practice and Disclosure Summit’, on 29 June.

Tougher fines, clearer definitions

The raid on DWS, alongside the US SEC’s recent issuing of a landmark US$1.5 million fine to BNY Mellon Investment Adviser, for omitting and misstating information about ESG investment considerations for funds it has managed, is cause for optimism, said Fixler. According to reports, Goldman Sachs is the latest firm to face scrutiny from the SEC over claims related to ESG funds.

In addition to enforcement action, the SEC has proposed two rule changes, currently open for consultation, which would require asset managers to justify their use of ESG labels. The first proposal outlines the SEC’s intention to expand the Investment Company Act’s ‘Names Rule’ to a wider pool of sustainable funds, requiring issuers to ascertain at least 80% of their fund’s holdings matches the label. The second proposal will amend reporting rules concerning funds’ and advisers’ incorporation of ESG factors in their marketing material, including annual reports.

Regulatory efforts to clamp down on greenwashing are already in progress in Europe. SFDR was introduced in March 2021, outlining disclosure requirements for funds and other financial products claiming to have sustainability-related characteristics and objectives.

In February 2022, 20% of funds registered under SFDR’s Article 8 were found to be ‘questionable’, in terms of the credibility of their ESG characteristics. In March 2022, sustainability technology provider Clarity AI said equity funds labelled as Article 8 under SFDR are no more aligned with the environmental taxonomy than non-ESG funds.

Yet, despite a lack of consensus in the European investment community on classification the ESG risks and impacts of funds, investment levels in SFDR’s Article 8 and Article 9 funds have continued to grow. According to Morningstar, they had reached €4.05 trillion at the end of December 2021, which represents 42.4% of all funds sold in the European Union.

Fixler said that the rapid growth of the ESG funds market had led to a situation where ESG could mean “everything and nothing”, arguing that stronger regulation and clearer definitions were required.

“We have to be just as accurate on non-financial disclosure, as we are in financial disclosure,” said Fixler. “ESG isn’t just this warm, fuzzy thing – it’s a driver for a big chunk of your business. This is adding a tremendous amount of top line and bottom line, and you have to back it all up with real data points.”

As well as increased mandatory regulation on ESG-related disclosures by asset managers and other financial service providers, there are increasing efforts to standardised sustainability-related reporting by corporates. The International Sustainability Standards Board (ISSB) aims to offer a ‘baseline’ for global sustainability reporting, and is currently finalising general sustainability and climate reporting standards.

“This is where we have greater definitions of ESG terminology,” Fixler said. “We have actual standardised reporting requirements. I think that this is the way forward to really try and deter greenwashing and at least mitigate the misrepresentation and mis-selling to investors.”

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