As an environmental, social and governance (ESG) assurance and reporting provider, Prime Advocates has always been aware of the importance of asset managers accurately reporting the level of ESG integration in their portfolios. This includes the extent to which funds employ ESG screening and engage companies demonstrating weak performance on ESG issues.
ESG investment is increasingly popular. The Global Sustainable Investment Alliance estimated in its 2020 Investment Review that sustainability-aligned assets have swollen to 35.3 trillion USD globally, representing some 30% of all assets under management. However, it is unclear how many of these assets are truly sustainable and how many have been flagged as such for marketing purposes.
In recent weeks, DWS Group has come under scrutiny for false and misleading claims, with Asoka Woehrmann resigning as CEO of the firm on 1 June 2022 after DWS was embroiled in scandal. Since 2018, Deutsche Bank has held 79.5% of DWS, with the remaining 20.5% floating on the Frankfurt Stock Exchange. The news is therefore embarrassing for Deutsche Bank and awkward for other shareholders.
At the root of the controversy is DWS’s 2020 Annual Report, which claimed that more than half of the firm’s assets under management integrated ESG considerations. It emerged, however, that only a small number of its funds screened against ESG criteria. After inconsistencies emerged, both German regulators and the US Department of Justice and Securities and Exchange Commission began to investigate DWS and its claims to employ ESG screening. At the end of May 2022, the situation escalated with a raid on DWS’s offices in Frankfurt by the German Financial Supervisory Authority, with evidence of wrongdoing being seized.
Since the announcement of the raid, DWS’s stock price has fallen rapidly. Sitting at 35.26 EUR on 30 May 2022, the day before the raid, it had fallen to 26.79 two weeks later on 13 June 2022, a decline of just over 24%. This follows another prolonged fall from a high of 41.75 EUR on 25 August 2021, the day it was announced that authorities in the US had opened up an investigation into ESG mis information at DWS. In total, DWS lost more than a third of its value within ten months.
This chain of events demonstrates that in a business environment in which stakeholder and market pressures may push asset managers to make ambitious and misleading claims about their sustainability, it is especially important for firms to ensure that they have a solid strategy for ESG integration and systemically and practically do what they say they do. Moreover, it demonstrates the value of external ESG data verification, both for the asset manager itself and for its investors, in order to bring trustworthiness to claims made in annual and impact reports.