ESG Developments This Week

In Washington, D.C.

SEC, Justice Department probe Deutsche Bank’s DSW sustainability claims

In the August 3, 2021, edition of this newsletter, we noted that Deutsche Bank and its asset management arm, DSW, were the subject of criticism by a former director of sustainability, Desiree Fixler, who had recently left the firm and had been publicly critical of the way DWS has performed on ESG, especially by comparison to the way, in her view, it markets its products. 

On August 25, the Wall Street Journal reported that the Securities and Exchange Commission (SEC) and the U.S. Attorney’s office in Brooklyn (New York) are now investigating Fixler’s charges. The Journal reported as follows:

“U.S. authorities are investigating Deutsche Bank AG’s DB 1.14% asset-management arm, DWS Group, after the firm’s former head of sustainability said it overstated how much it used sustainable investing criteria to manage its assets, according to people familiar with the matter.

The probes, by the Securities and Exchange Commission and federal prosecutors, are in early stages, the people said. Authorities’ examination of DWS comes after The Wall Street Journal reported that the $1 trillion asset manager overstated its sustainable-investing efforts. The Journal, citing documents and the firm’s former sustainability chief, said the firm struggled with its strategy on environmental, social and governance investing and at times painted a rosier-than-reality picture to investors….

The probes indicate regulators’ interest in money managers’ efforts to offer products related to climate change, social issues and corporate governance risks. The SEC earlier this year established an enforcement task force to look for misleading ESG claims by investment advisers and public companies.

The Wall Street Journal reported earlier this month that DWS told investors that ESG concerns are at the heart of everything it does and that its ESG standards are above the industry average. But it has struggled to define and implement an ESG strategy, according to its former sustainability chief and internal emails and presentations.

For instance, DWS said in its 2020 annual report released in March that more than half of its $900 billion in assets at the time were invested using a system where companies are graded based on ESG criteria. An internal assessment done a month earlier said only a fraction of the investment platform applied the process, called ESG integration. The assessment added there was no quantifiable or verifiable ESG-integration for key asset classes at DWS.

Desiree Fixler, at the time DWS’s sustainability chief, told the Journal that she believed DWS misrepresented its ESG capabilities.

A DWS spokesman said the firm stood by its annual report and that an investigation by a third-party firm found no substance to Ms. Fixler’s allegations. He said standards for defining ESG assets are constantly evolving, and that DWS has been seen by the market as being more conservative than most of its competitors in the definition.”

On Wall Street and in the private sector

Former ESG advocate turned critic continues criticism 

Tariq Fancy, the former CIO for sustainability at the world’s largest asset management firm and ESG pioneer BlackRock, was back in the news last week with further criticism of ESG. This time, he targeted green debt instruments specifically:

“A report published in July, looking at five of the world’s top markets, said that this type of investing had $35.3 trillion in assets under management during 2020, representing more than a third of all assets in those large markets. And the trend is not showing any signs of slowing down.

But Tariq Fancy, who was BlackRock’s first global chief investment officer for sustainable investing between 2018 and 2019, warned that there were some fallacies associated with this area.

“Green bonds, where companies raise debt for environmentally friendly uses, is one of the largest and fastest-growing categories in sustainable investing, with a market size that has now passed $1 trillion. In practice, it’s not totally clear if they create much positive environmental impact that would not have occurred otherwise,” Fancy said in an online essay posted last week.

This is because “most companies have a few qualifying green initiatives that they can raise green bonds to specifically fund while not increasing or altering their overall plans. And nothing stops them from pursuing decidedly non-green activities with their other sources of funding,” he added….

He also argued that financial institutions have an obvious motivation to push for ESG products given these have higher fees, which then improves their profits….”

Asset management firm issues warning about ESG and increasing capital costs

A senior credit analyst at a British asset management firm has issued a warning that ESG mandates and practices are making the currently predominant forms of energy more expensive in what is perceived as an already inflationary environment. By increasing the costs of raising capital, the warning argues, ESG is making fossil fuel exploration and recovery a more costly pursuit:

“ESG concerns are rapidly raising the cost of borrowing for oil companies as interest in hydro-carbon investment wanes and fund mandates become ever more restrictive, according to Aegon Asset Management’s Eleanor Price. [sic]

Eleanor Price, Senior Credit Analyst at AAM, says that while many oil companies are in better health from a credit perspective than they have been in recent years, having seen their balance sheets bolstered by strengthening oil prices in 2021, they are finding it increasingly difficult to raise financing as the pool of willing investors shrinks and banks bow to pressure to decarbonise their lending operations….

Price says that with most new client mandates requiring an increasingly stringent ESG focus, it is unsurprising that investors are shying away from such an environmentally unfriendly sector. However, she believes it is significant that this shift is happening so quickly at a time when oil companies offer solid credit fundamentals and attractive coupons. 

“In a market hungry for yield, it’s a brave investor who would completely eschew all hydro-carbon investment, but for the issuers it must feel like an ongoing game of musical chairs as their available investor bases continue to shrink,” she says. “This is not just a High Yield phenomenon – the pool of available lending banks is also shrinking as institutions come under increasing pressure to decarbonise their lending operations.””

In the Spotlight

Wal-Mart website features FY21 ESG summary 

Wal-Mart, one of the world’s largest companies, has begun an effort to highlight what it touts as its environmental record and waste-cutting initiatives. Last week, Waste360 reported the following:

“Walmart is now cataloging its progress regarding key ESG metrics in a new, “living” digital format on the company’s website.

The interactive document includes the Arkansas-based retailer’s FY21 ESG summary and data tables in its journey to become more circular.

Kathleen McLaughlin, executive vice president and chief sustainability officer, Walmart Inc., announced the accessibility of the data, saying: “The briefs will be refreshed online periodically, providing our stakeholders with timely information. We have updated our list of priority issues based on recent stakeholder engagement, reflecting stakeholder expectations, relevance to our business, and Walmart’s ability to make a difference in four broad themes of opportunity, sustainability, community and ethics and integrity.””