Sustainable finance poses a compliance risk you can no longer afford to ignore, no matter whether you are green or brown. Offering green investment products without actually doing so can get you into serious trouble. Asoka Woehrmann, the chief executive officer at DWS, Deutsche Bank’s asset management arm, can tell you all about it.
Woehrmann stepped down this week after German authorities raided the Frankfurt offices of Deutsche and DWS searching for evidence of green-washing. The raids were part of an official Bafin probe triggered last August by DWS whistleblower Desiree Fixler, who claimed DWS was misleading its clients with bold sustainability claims that did not stand up to scrutiny.
With assets under management of some 317 billion euro, DWS Investment SA ranks second on the top 20 list of management companies in Luxembourg, as based on the latest annual ManCo Observatory, just published this week by PWC Luxembourg. “Not communicated,” the PWC survey said in its column for the ESG proportion of DWS’ assets.
The “ESG proportion” column is a new addition this year to the PWC ManCo Observatory and dissects the 20 biggest manco’s into four groups. Only two of them, BNP Paribas Asset Management and AllianceBernstein, get top, four-star marks for being in the 76-100 percent ESG proportion category. Pack leader JP Morgan AM ranks in the three-star 51-75 percent category, together with Amundi, Eurizon and FundRock.
Lack of reliable data seen as top challenge
The average ESG proportion stood at 37 percent at the end of 2021, said PWC. Luxembourg ManCo’s expect to further increase the share of sustainable investments as part of their assets under management to 45 percent next year, and to 60 percent in 2024. This year will be the “year of ESG acceleration,” PWC said.
When it comes to sustainable finance, management companies have an important role to play to ensure compliance. Doing that well requires them to juggle data accuracy, or a lack of data, with an EU sustainable finance framework that has yet to be harmonised and rising costs for data collection and reporting. “They are facing challenges,” PWC dryly noted.
The absence of reliable data was mentioned by 27 percent of respondents as the top challenge.
A solid 87 percent of the ManCo’s surveyed said sustainability and ESG initiatives will play an increasingly important role in their long-term investment plans, placing green finance well ahead of other priorities such as digitalisation, talent acquisition and cybersecurity.
In all honesty, the EU sustainable finance framework with its widely discussed taxonomy on green investments is not making it optional. Requirements have become increasingly stringent over the years. Many financial sector firms warmly embrace this opportunity as a chance to do good, while some others still appear to take a more cynical approach, although probably not for much longer.
Frankfurt raids send clear signal to industry
This week’s Frankfurt raids on DWS fuel the pro-ESG campaign and send a clear signal to the industry: sustainability in the financial sector needs to be treated seriously, and be recognized as a compliance risk. Even in the US, the Securities & Exchange Commission, noting mounting concerns over a lack of consistent standards for sustainable investments, has begun to crack down on green-washing.
So while the Frankfurt police are searching for green-washing evidence at DWS, there are also fund managers around that fear disclosing their sustainable assets, “bleaching” their sustainable portfolios. Especially in the fund-of-funds business this is a concern, given that reliable ESG data in some cases is hard to corroborate.
Luxembourg’s asset management community, at a May conference hosted by law firm Elvinger Hoss and consultancy Deloitte, was introduced to the concept of “green-bleaching”. The term has been coined to describe the understating - as opposed to overpromising - by asset managers when it comes to the sustainability component of their portfolios.
“The myth of sustainability preferences is that in many cases, it’s a numbers game. You will be measured on what percentage of taxonomy alignment you have,” said Elizabeth Gillam, head of EU government relations and public policy at Invesco, at the conference, referring to the specific categories for ESG (“Article 8”) and impact investments (“Article 9”) under the EU’s sustainable finance rules.
Green-bleaching risks for fund-of-funds
A group of industry stakeholders recently told the European Securities and Markets Authority, ESMA, that green-bleaching may become problematic. “While avoiding green-washing is a necessity, there could also be a reverse problem: green-bleaching, meaning fund managers that invest in sustainable activities but refrain from claiming so to avoid the data problems arising from the disclosure obligations.”
When it comes to green finance, like in nature itself, there are more shades of green. Investing in a world that sees fifty shades of green can benefit from better guidance from regulators and EU authorities like Esma. That guidance, so Luxembourg has been told, is on its way. However, those who hope that sustainable finance will be seen as yesterday’s fashion stand to be disappointed.
In Flux is a regular column on Investment Officer shedding light on the Luxembourg financial ecosystem. Financial journalist Raymond Frenken is Editorial Manager of InvestmentOfficer.lu. He has followed financial markets and EU regulation for more than two decades. Earlier in his career he was Amsterdam bureau chief for Bloomberg News, Benelux correspondent for FT/MarketWatch, EU correspondent for CNBC in Brussels, and until 2021 director of communications at the European Banking Federation in Brussels.
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