At Deutsche Bank’s DWS, Issues With Data Were at Heart of Sustainable-Investing Problems – The Wall Street Journal

At Deutsche Bank’s DWS, Issues With Data Were at Heart of Sustainable-Investing Problems  The Wall Street JournalAt Deutsche Bank’s DWS, Issues With Data Were at Heart of Sustainable-Investing Problems  The Wall Street JournalAt Deutsche Bank’s DWS, Issues With Data Were at Heart of Sustainable-Investing Problems  The Wall Street Journal

By Ken Brown Close Ken Brown Biography @kenbrown12 Ken.brown@wsj.com, and Patricia Kowsmann Close Patricia Kowsmann Biography @kowsmann In its most recent annual report, Deutsche Bank AG’s DWS Group stated that “ESG data” is the foundation of its ESG analysis. This refers to Deutsche Bank AG’s push to be a leader within one of the most popular segments of Wall Street, which involves using environmental, governance, and social criteria to make investment decisions. DWS executives questioned the data and fund managers refused to use the information to decide which investments to make. According to previously unreleased emails and Desiree Fixler, the company’s former sustainability chief. DWS’s troubles have rippled through the sustainable-investment industry, which has grown from a niche into a mainstream part of Wall Street. Asset managers who manage trillions of dollars seek to influence boards and avoid risks by investing in companies that are more fair and avoid environmental pitfalls. DWS’s troubles have rippled through the sustainable-investment industry. Photo: Mauritz Antin/EPA/Shutterstock In August, The Wall Street Journal reported that DWS struggled to define and implement an ESG strategy, at times painting a rosier-than-reality picture to investors, according to Ms. Fixler and internal emails and presentations. The Securities and Exchange Commission and federal prosecutors last month opened investigations into claims that DWS overstated how much it used sustainable-investing criteria to manage its assets, according to people familiar with the matter. According to a source familiar with the matter, BaFin, Germany’s financial regulator, is currently investigating the matter. Robert Rubinstein, founder and CEO of TBLI Group, a Dutch company that advises investors on sustainable investing, said, “There is now a new layer of scrutiny among investors whether ESG funds really do what they claim.” A spokesperson for DWS pointed out previous statements made by the firm. It stated that it stands behind its ESG disclosures and rejects Ms. Fixler’s allegations. These were investigated by a third party firm. Regulators are closely monitoring investment firms’ claims regarding ESG. We are looking at funds that claim to be something: They’re green, sustainable, and the like. In a recent videoconference with European Parliament members, Gary Gensler, Chairman of the SEC, stated that there is more than that. Desiree Fixler filed a case against DWS challenging her dismissal. Photo by Dorothy Hong for The Wall Street Journal. DWS stated in August that it has always been transparent regarding its ESG capabilities. It separates funds that are dedicated ESG from those that are screened for ESG risk, a process it calls ESG Integration. Ms. Fixler was fired by DWS earlier in the year. She has filed a lawsuit against her dismissal at a German labor court. She claims she was dismissed by the company for raising concerns about the ESG program. The company denied her claims. DWS executives stated in an internal presentation that the company denies her claims. One executive from October 2020 stated that an internal report compiling ESG information for fund managers was being published every six week instead of four weeks due to a lack in resources in one department. The executive stated, “This is an operational risk.” He also stated that the next report, due to be published in November, would contain data for September. Investment returns could be affected by outdated or flawed data. DWS developed an “ESG Engine,” a tool that provided ratings to fund managers. In May 2020, it downgraded Amazon.com Inc.’s lowest F rating to its lowest level. This rating indicated that the company had behaved so badly that its existence was in jeopardy. It could be hit with large fines by regulators and consumers might leave. The Archives Wirecard was once the darling of Germany’s fintech industry, until auditors discovered a $2 billion gap in its accounting. (Originally published June 26, 2020). Ms. Fixler stated that the rating was absurd. She stated that “nothing was going to threaten the viability Amazon.” Amazon was experiencing a pandemic surge of business at the time. Its shares rose 42% between May 2020 and the end. DWS’s ESG Engine made a similar mistake with Wirecard AG, a German payments company that was allegedly involved in fraud and money laundering scandals. Ms. Fixler stated that Wirecard received a B-grade in business ethics and that its overall rating was high enough to be included in dedicated ESG funds. It collapsed in June 2020. DWS claimed a loss of 600 million euros, or approximately $703 million, in Wirecard’s bankruptcy court case. DWS had stated that ESG was the core of everything it did, but the presentation claimed that it was up to individual fund manager to implement the strategies. According to Ms. Fixler, some fund managers at large funds didn’t use data from the ESG Engine. Ms. Fixler said that this was partly due to the difficulty of using the database. Ms. Fixler stated that if it isn’t easy, people won’t use it. Morningstar, which provides sustainability ratings and reports, published a report last November on ESG commitment levels among various funds. It stated that DWS Top Dividende was one of the largest funds. However, it used the ESG integration approach in building its portfolio. However, it still included ESG laggards, including one company with the lowest climate risk score of F. SHARE YOUR THOUGHTSHave you ever invested in green funds or companies? Why or why not? Let’s have a conversation. Morningstar stated that the fund manager was willing to invest in stocks with high yields, even if they were associated with high ESG risk. Morningstar also reviewed some ESG-dedicated funds of DWS and concluded that their commitment levels were high. The ESG-related data firms that analyze businesses are under increasing regulatory scrutiny. The Journal reported that hundreds of companies received drastically different grades from different rating firms on these factors. Documents show that DWS’s ESG data was obtained from outside sources and then averaged together. Ms. Fixler stated that this was a problem because if one firm gave a company an “A” and another gave it a “F”, the result was “right at the middle, everything looks OK.” DWS could therefore be exposed to potentially risky companies without being aware. Wirecard was downgraded by at least one ESG data company before it collapsed, but another firm maintained a high rating. Wirecard was not downgraded because the data of the latter firm was given more weight by DWS’s database. DWS knew about the risk of using average scores to make investment decisions. In a February email to colleagues, an executive stated that “we should be very careful about using this as something prescriptive.” The Journal viewed the email. This article was contributed by Simon Clark. Write to Ken Brown at ken.brown@wsj.com and Patricia Kowsmann at patricia.kowsmann@wsj.com Copyright (c)2021 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8

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