This is a guestblog by Tobias Liebsch – Chief Growth Officer at Fintalent, the hiring platform for M&A professionals.
A rich banker’s downtown Frankfurt office gets raided. The allegations: greenwashing.
What sounds like an eco-warrior’s fantasy actually happened at the end of May: the headquarters of Deutsche Bank’s asset management branch, DWS, were raided by 50 state officials, after a whistleblower reported a misuse of sustainable investment criteria.
Let’s shed some light on what went wrong with DWS, and how data can help fix it.
What are asset managers, and what do they have to do with ESG?
Asset management firms are essentially distributors of money. They collect money from one side (from individuals, or institutional investors), and invest them in a number of investment options – like real estate, stocks, bonds, and all kinds of other asset classes.
The main idea behind the business model of the asset managers is that they are super smart about where to invest – they understand the markets, and do some analytical math to be ahead of the other market participants.
The result is, in an ideal world, a positive return on the assets invested. You invest money through the asset manager, they make it grow, take a cut, everyone’s happy. So far, so good.
But your money might fund shady businesses. Arms. Tobacco. Gambling. And you don’t want that, right?
That’s why asset management firms set up funds with specific criteria. And that’s where ESG comes into play: And ESG fund should adhere to certain environmental, social, and governance criteria. And that’s… where things get messy.
What are ESG investment criteria and why did DWS get raided?
The EU’s Sustainable Finance Disclosure Regulation (SFDR) introduced articles 6,8 and 9, that define three different classes of funds:
- Funds which do not integrate ESG investment criteria
- Funds that promote environmental, social, or corporate governance topics
- Funds that target sustainable investments
The claims that brought DWS to their knees? Greenwashing. According to their former Chief Sustainability Officer, Desiree Fixler, DWS claimed to incorporate ESG criteria into their investments, when in reality, they only did so in a minority of them. That means: you feel like you’re investing in a fund that promotes the good of the planet of the people, but in fact, you’re victim to a bunch of fraudulent fund managers.
But how can that happen? The answer: ESG criteria are still not clearly defined.
Why are ESG investment criteria so unclear?
The sad reality: there is currently no clear legal definition of what ESG investments actually need to be.
In fact, the certifications are being handed out by private companies – while many of them work with the public’s best interest in mind, it’s very likely that many of them operate similar to rating agencies in The Big Short.
As Sasja Beslik, one of the leading voices when it comes to ESG investing, puts it: Regulators have to take a stand and create a level playing field. One of his suggestions: a price for carbon, similar to a carbon tax. That would immediately fix all issues, because it would allow investors to implement the carbon pricing into their valuations models.
With the new EU Taxonomy, we can expect some first rules to clarify what asset managers need to state.
But don’t expect miracles.
We’re still far away from a world where every fund has to state clearly and measurable ESG criteria. But baby steps are being made. Let’s hope they don’t come too late.