In my last post I wrote about seven principles for ESG investing. I developed these principles in collaboration with Desiree Fixler. Ms. Fixler was the group sustainability officer at the large German asset management firm DWS. She was fired after six months on the job when she raised concerns internally about the firm’s marketing practices around ESG investing products. The goal in this piece was to suggest some simple principles to help any asset manager who is constructing and selling ESG investment products. Since DWS is now being investigated by BaFin (the German securities regulator) and the Securities Exchange Commission (SEC) and Department of Justice in the U.S., the DWS situation has been a “teaching moment” for asset management firms all over the world.

A compass with text and icons – Principles | GETTY

A key point Ms. Fixler and I made is that since there is so little regulation regarding ESG investment products, it is important that asset managers manufacturing and selling them be clear about what this term means to them. That said, regulators are starting to address this issue. In the U.S., on April 9, 2021, The Division of Examinations at the SEC published a Risk Alert on ESG Investing which states that the SEC will be evaluating portfolio management, performance advertising and marketing, and compliance programs. AMF, the French equivalent to the SEC, has also issued guidance in its July 27, 2020 position/recommendation paper “INFORMATION TO BE PROVIDED BY COLLECTIVE INVESTMENT SCHEMES INCORPORATING NON-FINANCIAL APPROACHES.” So has BaFin, “BaFin Consultation on Guideline for Sustainable Investment Funds,” on August 2, 2021. In June of 2021 the International Organization of Securities Commissions (IOSCO) published a Consultation Report “Recommendations on Sustainability-Related Practices, Policies, Procedures and Disclosure in Asset Management.” Also worth noting is the EU’s “Sustainable Finance Disclosure Regulation” and its guidelines for what can be deemed as Article 8 and Article 9 funds.

I found the July 19, 2021 letter, “Authorised ESG & Sustainable Investment Funds: improving quality and clarity,”  by the U.K.’s Financial Conduct Authority (FCA), the U.K. equivalent of the U.S. SEC,  sent to the chairs of asset management firms, to be especially thoughtful. This letter was informed by extensive fact-finding work, as well as a research project on how consumers react to funds’ sustainability claims and make investment decisions. One finding of the research was that objective labels matter. Another was that consumers cannot easily identify exaggerated or misleading claims. 

The letter begins by noting how strong investor interest is driving the tremendous growth in ESG products, by whatever name. The FCA notes that there “is now a wide spectrum of ESG and sustainable investment funds, reflecting different objectives, investment strategies and characteristics.” It expresses its support for the product innovation taking place, but also notes some significant challenges “such as improving ESG-related data and metrics.” It also expresses its concern about “the number of poor-quality fund applications we have seen and the impact this may have on consumers” and clearly states that “This must improve.” Towards that end the letter lists three principles that asset managers should follow. The overarching principle is Consistency: “A fund’s ESG/sustainability focus should be reflected in its design, delivery and disclosure. A fund’s focus on ESG/sustainability should be reflected consistently in its name, stated objectives, its documented investment policy and strategy and its holdings.”

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