Asset managers are encountering heightened examination concerning their assertions of sustainable investing. Allegations vary from apathy towards environmental concerns to blatant misleading claims in promoting “green” funds. Global financial regulators are intervening to protect investors.
In the year 2023, DWS, the investment division of Deutsche Bank, incurred a $25 million penalty from the US Securities and Exchange Commission (SEC) due to “inaccuracies” related to its environmental, social, and governance (ESG) practices. Likewise, Goldman Sachs Asset Management resolved allegations of ESG violations by paying $4 million to the SEC in 2022. Authorities are tackling the matter with increased rigor.
The European Securities and Markets Authority revised its guidelines for naming ESG funds, stipulating that any funds incorporating “ESG” or “sustainable” in their titles must ensure that at least 80% of their investments reflect environmental qualities. Similar regulations are set to be implemented in the UK by December 2024. Consequently, a number of asset managers have eliminated the term “sustainable” from their fund titles.
Asset managers under scrutiny for ESG assertions
Insights from consultancy Broadridge indicate that in 2023, 79 funds across Europe omitted the label “sustainable” from their names, with an additional 26 following this trend in the initial eight months of 2024. In comparison, 99 funds had incorporated the term in 2022, prior to the escalation of regulatory scrutiny.
Abhijay Sood, senior research manager at the advocacy organization ShareAction, commented, “Certain asset managers still embellish the truth to earn the trust and business of responsible investors.” The NGO’s report highlighted that numerous asset managers are still channeling investments into companies that are increasing oil and gas production while neglecting low-carbon energy options. The Kunming-Montreal Global Biodiversity Framework, an industry pledge backed by many asset managers, aims to conserve one-third of the planet’s terrestrial and marine environments by 2030. Nonetheless, critics contend that it may function as yet another marketing tactic instead of a sincere commitment to biodiversity initiatives.
Sood noted, “Up until 2022, there appeared to be greater momentum among asset managers to tackle climate change. Our research indicates that most of this involved signing agreements and demanding enhanced disclosure rather than taking substantive action.”
The Investment Association, which represents UK asset managers, asserts that the industry has significantly contributed to the shift towards sustainability in the economy. Paul Scaping, a public policy expert at the association, pointed to the reduction of coal use in the UK and the surge in renewable energy generation as significant contributions from the sector.
Regulatory pressure may compel the asset management sector to genuinely incorporate sustainable practices into their investment strategies, guaranteeing that their pledges to combat climate change transcend mere rhetoric.
