“Greenwashing” maybe 2022’s word of the year as authorities in the U.S. and elsewhere continue to crack down on misleading environmental, social, and governance, or ESG, labels on investment funds.

Gone are the days of labelling a product without disclosing what that means. On Wednesday, Asoka Woehrmann, CEO of German asset manager DWS Group (DWS.Germany), said he would step down next week over claims of so-called greenwashing of DWS products. The term refers to providing misleading information suggesting that products or investments are more environmentally sound, or “green,” than they actually are. 

“If you are focused on investing with an ESG orientation, [it’s important] that you look under the hood,” says Todd Rosenbluth, head of research at VettaFi. 

In February 2021, Woehrmann told Barron’s that beginning that year, every new investment product launched by asset manager DWS would be an ESG fund. A month later, however, whistleblower Desiree Fixler, DWS’s former head of sustainability, alleged the firm had misrepresented its ESG capabilities in its 2020 annual report. Her claims prompted the SEC and German regulator BaFin to open investigations.

The news of Woehrmann’s departure comes a day after German prosecutors raided the DWS offices and the headquarters of its majority owner, Deutsche Bank (ticker: DB). 

Margaux Day, policy director at Accountability Counsel, says there has been a “culture of impunity” when it comes to mislabeling ESG investments. “Investors who are claiming to make ESG investments need to have accountability frameworks in place,” she says.

As ESG strategies have exploded in popularity, asset managers have raced to add ESG funds to their offerings. According to Morningstar, 121 new sustainable funds were launched and 26 existing funds adopted a sustainable investment mandate. Today, there are five times as many sustainable funds in the U.S. as a decade ago, and three times more than five years ago. 

The proliferation of ESG and sustainable funds has drawn scrutiny from investors and regulators, increasingly demanding evidence to back up ESG claims.

“Once again, we’re learning a universal lesson of investing, which is, there’s no substitute for doing your research. Just because a fund, or a company, is claiming to be sustainable, ESG-friendly, or climate-conscious, doesn’t necessarily make it so,” says Lee Reiners, executive director at the global financial markets centre at Duke University School of Law. 

“It’s really up to each investor if these are issues that they genuinely care about, to do a little research and ensure that whatever they’re investing in, be it an index fund, an ETF, or a company, is actually putting their money where their mouth is.”

Last month, the SEC proposed new rules that would force money managers to take greater care when naming their products. A fund dubbed growth or value would have to maintain 80% of its investments in that category under the proposals. Those calling themselves green or low-carbon would have to explain how they achieve their environmental aims. The proposed rules come amid concerns about greenwashing among ESG funds and advisors.

The agency has said ESG investing is one of the areas of significant focus for 2022. Last year, it announced the formation of a Climate and ESG Task Force within the Division of Enforcement to “proactively identify ESG-related misconduct.”

The SEC’s investigation and enforcement actions that target ESG claims by investment managers are an effort to protect investors, says Margaret Peloso, lead sustainability partner at global law firm Vinson & Elkins. 

“Investment managers need to do what they say they are going to do concerning ESG,” she says.

In May, BNY Mellon Investment Adviser paid the SEC $1.5 million to settle charges that the New York-based mutual fund manager misrepresented the ESG reviews it made of investments. The bank didn’t admit to the administrative charges.

“The SEC is serious about ESG and greenwashing,” Jefferies said in a research report, adding that greenwashing is “one of the most pertinent issues voiced by frustrated stakeholders.”

Rosenbluth says that if investors were "sceptical about whether ESG was adding value, not just to their portfolio,” the renewed attention to greenwashing “could give them pause.”

That said, he also sees opportunity. “We could see demand modestly slow if asset managers need to pull back on their awareness and marketing efforts. But there’s also an opportunity here for asset managers to educate the investor base, tell their story, and highlight how focused they are, if they are, on ESG.”

Source: Barron's

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