Asset managers are facing increased scrutiny over their claims of sustainable investing. Accusations range from indifference towards environmental issues to outright deception in marketing “green” funds. Financial regulators worldwide are stepping in to safeguard investors.
In 2023, DWS, the investment arm of Deutsche Bank, paid $25 million to the US Securities and Exchange Commission (SEC) for “misstatements” about its environmental, social, and governance (ESG) processes. Goldman Sachs Asset Management also settled ESG violation allegations with a $4 million payment to the SEC in 2022. Regulatory bodies are addressing the issue more rigorously.
The European Securities and Markets Authority updated its ESG fund naming guidelines, requiring funds with “ESG” or “sustainable” in their names to ensure at least 80 percent of investments adhere to environmental characteristics. Similar rules will take effect in the UK in December 2024. As a result, many asset managers have dropped the word “sustainable” from fund names.
Asset managers scrutinized for ESG claims
Data from consultancy Broadridge shows that 79 funds in Europe removed the term “sustainable” from their names in 2023, with 26 others following suit in the first eight months of 2024. In contrast, 99 funds added the term in 2022, before the regulatory scrutiny intensified.
Abhijay Sood, senior research manager at campaign group ShareAction, says, “Some asset managers still stretch the truth to gain the trust and business of responsible investors.” The NGO’s report found that many asset managers continue to invest in companies expanding oil and gas production while underinvesting in low-carbon energy opportunities. The Kunming-Montreal Global Biodiversity Framework, an industry pledge supported by many asset managers, seeks to protect a third of the planet’s lands and seas by 2030. However, critics argue that it might serve as another marketing tool rather than a genuine commitment to biodiversity efforts.
Sood remarked, “Until 2022, there seemed to be more momentum among asset managers to address climate change. Our analysis shows most of this involved signing commitments and demanding more disclosure rather than real action.”
The Investment Association, representing UK asset managers, contends that the industry has played a significant role in the economic transformation towards sustainability. Paul Scaping, a public policy specialist at the association, highlighted the phasing out of coal in the UK and the rise of renewable electricity generation as examples of the sector’s contributions.
The regulatory pressure may drive the asset management industry to authentically integrate sustainable practices into their investments, ensuring that their commitments to fighting climate change are more than just lip service.
