Last month, the Chief Executive of Deutsche Bank’s fund’s arm DWS, Asoka Woehrmann, resigned following raids by the German authorities at its head office (and the bank’s), with the spokesperson for the Public Prosecutor announcing that they had:
“…found evidence that could support allegations of prospectus fraud.”
The German authorities’ actions follow investigations commenced by the Securities and Exchange Commission (SEC) and federal prosecutors in the US and accusations made by DWS’ former Head of Sustainability, Desiree Fixler, that the fund had made misleading statements in its 2020 report about the size of funds invested under ESG criteria. Ms Fixler stated that the issue had been “misuse(d) as a marketing tool.”
Whether the allegations are substantiated, there is evidence of the loose use of ESG criteria in the fund’s marketing material. After the EU’s Sustainable Finance Disclosure Regulation came into effect in March 2021, the proportion of the fund stated to be invested, pursuant to such criteria, was one-quarter of that listed in the 2020 prospectus.
ESG investments, greenwashing and claims of financial mis-selling
The above reflects the shifting landscape of ESG investments. The number of assets being described as ‘ESG’, ‘Sustainable’, or ‘Low Carbon’ has risen almost threefold from $1 trillion in 2019 to $2.7 trillion. However, there has been a similar growth in accusations of ‘greenwashing’, attempts by regulatory bodies to bring greater transparency in the area, and even, as in the present case, action taken against individual funds.
The immediate impact on the fund of the announcement of the raids – its shares falling in value by as much as 4.6% – demonstrates how the ‘new’ area of ESG investments can give rise to more traditional claims of financial mis-selling. Understandably, the same factors have caused ESG investments to be, according to the Financial Times, “the fastest-growing segment of the asset management industry”. This can cause share values to plummet should those assets prove to be less ESG compliant than investors had been led to believe.
Assuming a loss can be shown, one of the challenges facing investors will be what meaning should be given to the various ESG pronouncements. This will depend on the assurances given, but, for example, what is and is not ‘sustainable’ or ‘green’ is clearly an area ripe for disagreement. That being said, the chair of the SEC, Gary Gensler, has said that:
“it may be time to make it easier to tell if green or sustainable funds are really what they say they are” which he compares to being able to “tell if milk is fat-free by just looking at the nutrition label.”
Misleading ESG investment claims
It is easy to see how claims made about the ethical nature of certain products, increasing pressure from shareholders for companies to comply with ESG objectives, and a relative lack of (but increasing) transparency, alongside uncertainty as to precisely how ESG should be measured, will give rise to disputes across of broad range of areas.
This is likely to include:
- Mis-selling claims – e.g. a product is marketed as ‘green’ but includes investments in nuclear and/or gas which fall in value resulting in a loss to the investor who disputes their inclusion within the fund.
- Breach of contract – e.g. a clause is included within a contract with a supplier requiring compliance with a company’s ESG objectives, the supply chain is subsequently shown to include child/forced labour.
- Breach of warranties – e.g. warranties are given in a SPA in relation to ESG compliance that is breached. The breach causes reputational damage and damages the value of the company acquired and/or purchaser.
- Action by shareholders – e.g. shareholders commencing litigation to compel the company board to comply with ESG objectives.
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