Last week, the WSJ reported that Deutsche Bank subsidiary DWS Group is being investigated not only by the German financial markets regulator, but also by the SEC and US prosecutors – due to allegations by DWS’ former head of ESG, Desiree Fixler, that the asset manager publicly overstates the level of ESG evaluation & screening it applies to its investments. A new interview with Fixler gives more details about her experiences.
The initial chain of events is somewhat predictable:
- News breaks that the firm is being investigated by German & US regulators – on top of the wrongful termination suit that it was already facing.
- The price of DWS shares dropped from a pre-announcement closing of 41.72 Euros to a 5-day low of 35.56 Euros, where it still hovered as of market close yesterday. That’s a sustained decrease in market value of 1.23B Euros against market capitalization of 8.34B Euros – or a 14.7% decrease – based on their stated outstanding shares.
- Cue the plaintiffs’ firms targeting Deutsche Bank for a potential shareholder class action suit.
That said, there are a couple of unique things here that could make things harder for DWS, Deutsche Bank, the asset management industry, and portfolio companies. First, unlike many events that affect share price for only a day or two, DWS’s share price has not yet bounced back.
More broadly, the event may also “damage the overall asset management industry in the long term” according to an article in ETFStream. This comes at a time when a new report from InfluenceMap found that of
… 593 [broad ESG-themed] equity funds with over $265 billion in total net assets … assessed, 421 of them, or 71%, have a negative Portfolio Paris Alignment score, indicating the companies within their portfolios are misaligned from global climate targets.
Climate-themed funds fared somewhat better – 72 out of 130 funds reviewed (55%) received negative Paris Alignment scores. These data points do not bode well for staking claims of credibility by the industry.
Similar concerns to those from Fixler have been expressed by another high profile former ESG investment executive Tariq Fancy. In the background, US asset managers also face the Risk Alert issued by the SEC on ESG investing and anticipate regulatory climate disclosure standards from the SEC.
What This Means
Although these actions focus on investors/asset managers, any organization implementing ESG initiatives and issuing public statements/reports on those program faces similar risks. I can’t predict how this will play out for DWS’s stock or equities in general – if I had that talent, I’d be rich! But it does seem that, at least for now, the allegations of ESG failures and the news of regulatory investigations based on those allegations pushed the price lower consistently for the past week.
I wrote earlier that companies create potential problems for themselves by how they spin questionable ESG data. My ongoing admonition is that no one should assume their company ESG reports or communications will not be read. More than ever, companies need to ensure their actions are consistent with their words – and should anticipate inconsistencies will be identified and made public.