ESG investing updates
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With environmental, social and governance investment standards under the magnifying glass, investors are heating up. German and US regulators last week launched probes into asset management group DWS over claims it misrepresented its ESG analysis. Analysis by the Financial Times suggests companies themselves could also be doing a better job of certifying their carbon emission offsets.
The DWS investigation follows allegations from a former head of sustainability that ESG capabilities were embellished. The revelations have raised valid questions about the odds of ESG living up to its purpose of shifting capital towards companies trying to do the right things.
Doing good is big business. Total assets in ESG funds have more than doubled to $2.2tn since the first quarter of 2020, according to Morningstar. ESG funds accounted for 40 per cent of DWS’s €21bn of net inflows in the first half of this year. Higher fees charged for ESG products provide an incentive to increase its potential universe.
But ESG certification is subjective. Its reliance on adviser choice is cause for concern. The investment creates a “dangerous placebo that harms the public interest”, thinks Tariq Fancy. He should know. Fancy used to run sustainable investing at BlackRock, the world’s largest asset manager. His view that ESG certification is providing a smokescreen for harmful practices is a critique that the industry must take seriously.
ESG fund investment allocation is a further point of contention. DWS, which has denied wrongdoing and stands by its annual report disclosures, included payments group Wirecard in its own ESG funds long after allegations of fraud surfaced. Heavy weightings in technology stocks also tend to feature in global ESG funds. Chipmaker Nvidia is one of the highest-scoring companies. Yet Nvidia markets products to high-energy use cryptocurrency miners. The scale of indirect carbon emissions for tech companies is almost as high as for car or food manufacturers, thinks Bank of America.
The DWS probe should encourage asset managers to up their game. Doing good needs to be done right.
The Lex team is interested in hearing more from readers on the subject of greenwashing and ESG investment. Please tell us what you think in the comments section below