Shares of the German investment manager DWS took a beating Thursday after the Wall Street Journal reported that the Securities and Exchange Commission and criminal prosecutors were investigating the firm for misleading clients about the nature of its sustainable investment offerings.
stock tumbled nearly 14% on the news, while shares of Deutsche Bank
which owns 80% of the company, fell about 2%, and experts say that this could be just an initial shot across the bow to an industry that has eagerly courted investors who want to put money into environmentally and socially responsible investments.
“This is the first of many more to come,” Amy Lynch, a former SEC regulator and president of FrontLine Compliance, told MarketWatch. “The SEC has been letting the industry know that this is an area they’re looking into for the past year. They’ve given every warning.”
Earlier this month, the Journal published an interview with Desiree Fixler, DWS’s former sustainability chief, who said that she believed the company was not being forthright about its commitment to environmental, social and governance, or ESG, goals.
“As chief sustainability officer, as a proponent of ESG, how could I not speak up on wrongdoing,” she said in a statement sent to the Journal. “Posturing with big statements on climate action and inclusion without the goods to back it up is really quite harmful, as it prevents money and action from flowing to the right place.”
Under the chairmanship of Gary Gensler, the SEC has made it a top priority to regulate what public companies must disclose about risks related to climate change and the environment, new information about its workforce policies and other polices that impact social issues.
At the same time, it has telegraphed its intention to hold investment managers responsible for clearly disclosing the principles they use to develop sustainable investment funds.
“When it comes to sustainability-related investing…there’s currently a huge range of what asset managers might mean 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.”
This could be easier said than done, however. According to the Forum for Sustainable and Responsible Investment, one out of every three dollars under professional management in the U.S. was “managed according to sustainable strategies” in 2020, to the tune of $17.1 trillion.
Johannes Borgen, a closely followed financial-services-sector investor on Twitter, argued that the size of the market is a reflection of the shallowness of ESG funds’ actual commitment to sustainability.
Commissioner Hester Peirce has made a similar argument from within the SEC, saying in a speech in July that “ESG as a category of topics is ill-suited and perhaps inherently antithetical to the establishment of clear boundaries and internal cohesion.”
She argued that many issues that are thought of as falling under the category of ESG are not easily quantifiable and cannot be standardized to allow for easy comparison across investments. This is illustrated by the inconsistent results produced by companies that have attempted to rate companies based on ESG criteria.
“Different ESG assessments are not surprising given that a technology, for example, can have both positive and negative climate effects and something that may be good for the climate may be bad from a social perspective, or even according to some other measure of environmental harm.”
Sean Tuffy, head of regulatory intelligence at Citi Securities Services, speculated on Twitter that the difficulty of crafting clear ESG rules could be one motivation for the SEC bringing this investigation.
Frontline Compliance’s Lynch pointed out that, at least from media reports, the case does appear to be driven by Fixler’s willingness to go public with her concerns, making it easier for regulators to prove that the the company intended to mislead its clients.
“In many ways it’s no different than any other approach to investing — you need to document and quantify your investment strategy with written policies and procedures,” that clearly communicate your goals and investment criteria, she said.
Future cases, however, may not be so cut and dry. “ESG is so hard to quantify,” Lynch said. “Even firms that are trying to do the right thing can run afoul because of the current lack of clarity.”