SEC fines Deutsche Bank subsidiary $19M for not keeping ESG promises

The SEC ordered a subsidiary of Deutsche Bank to pay a $19 million penalty for not delivering to clients what it promised in its ESG mutual funds.

In a Monday order, the Securities and Exchange Commission charged DWS Investment Management Americas Inc. with making misleading statements about incorporating environmental, social and governance factors into its ESG-integrated actively managed mutual funds and separately managed accounts.

The firm sold itself to investors as a leader in ESG. In 2019, a senior executive said in a marketing piece that ESG was “top of mind throughout our organization” and that DWS integrated ESG considerations into its investment process and used them to make investment decisions for their portfolios, according to the SEC order.

But the agency found that from August 2018 through 2021, the firm failed to implement certain aspects of its own global ESG integration policy as it had promised clients and investors it would do. The SEC also found that DWS failed to adopt and implement enforcement policies and procedures that would ensure the accuracy of the firm’s public statements about ESG-integrated products.

“Whether advertising how they incorporate ESG factors into investment recommendations or making any other representation that is material to investors, investment advisers must ensure that their actions conform to their words,” Sanjay Wadhwa, deputy director of the SEC’s enforcement division and head of its climate and ESG task force, said in a statement. “Here, DWS advertised that ESG was in its ‘DNA,’ but, as the SEC’s order finds, its investment professionals failed to follow the ESG investment processes that it marketed.”

The SEC also on imposed a $6 million penalty on DWS for anti-money-laundering violations. The firm neither admitted nor denied the SEC findings. A spokesperson for the firm was not immediately available for comment.

The SEC is telling funds they must put their investment selections where their mouth is when it comes to using ESG factors, said Ethan Powell, founder and CEO of Impact Shares, a nonprofit issuer of ESG exchange-traded funds.

“You better do what you say you’re doing not only in the way you manage toward financial outcomes but also toward social and environmental outcomes,” Powell said. “The industry deserves to have the scrutiny that’s being placed on it.”

The SEC’s action targeting DWS’ ESG violations comes just days after the agency approved a final regulation that in part targets “greenwashing” and strengthens rules designed to prevent funds from using misleading names.

The challenge for funds and investment advisors is that not everyone agrees on what ESG means. Under the SEC rule, investment companies can define the terms they use in fund names as well as the rubric they use to justify asset allocations. The agency will examine portfolios to see if they match the name framework.

“Reasonable investment professionals and business people can look at the same data and come up with differing conclusions, particularly when you’re using subjective criteria,” Powell said. “The question is what qualifies as an ESG investment?”