DWS Group, one of Europe’s biggest ETF providers, is engaging with index providers on embedding Net Zero and other sustainability objectives into indices, according to Robin Braun, the firm’s Senior Business Manager for Responsible Investment.
Speaking this week on a webinar hosted by Europe’s sustainable investment forum, Eurosif, Braun acknowledged that divestment is only possible “to a very limited extent when we deal with holdings in ETFs”, but that that engaging with index providers is “an option we still have”.
He said the asset manager plans to work with index providers in coming years to see whether they can alter the composition of their indices to be, for example, more in line with a Net Zero pathway, adding that such discussions will be an important part of DWS’ shift to Net Zero.
Braun explained that DWS has already engaged successfully with index providers on ESG issues. In 2018, it co-signed an investor letter asking providers to exclude controversial weapons from mainstream indices and agreed to play an active role in raising this issue in conversations with index providers including annual disclosure on progress and activities, he said.
“That is something we will intensify in the future and have an engagement plan with our team in the passive division to at least annually engage with one index provider to embed sustainability in the index construction; to report very transparently on what is in those indices and really set the standards for what we think should be in an index and what should not be in an index,” he added.
Braun’s comments come as passive managers face growing pressure to address sustainability issues – particularly climate change. As previously reported, Vanguard came under fire earlier this year for its exposure to fossil fuel assets in a report from the Institute for Energy Economics and Financial Analysis, a prominent US energy think tank. In a response to the report, Vanguard told RI: “We represent our investors who have chosen to predominantly invest in broad-based index funds. In accordance with this mandate, our index funds do not divest from specific securities in their benchmarks, including those in fossil fuel intensive industries.”
Just like DWS, Vanguard is a signatory of the Net Zero Asset Managers Initiative, which requires managers to make their entire portfolio Net Zero by 2050 at the latest, and set interim decarbonisation targets.
But index providers are also starting to commit to Net Zero, although those commitments appear to focus on developing new products. Last month, the Net Zero Financial Service Provider Alliance was launched with signatories including major index providers MSCI and S&P Global. Index provider signatories are pledging to “the maintenance of existing and addition of new net zero aligned broad-based indices” and to set interim targets for 2025 within 12 months of joining the alliance.
When asked whether the signatories are also required to alter existing indices, a spokesperson for the Alliance said: “The commitment as part of the Alliance is to provide net zero aligned index in every market so that asset owners can benchmark against them, rather than altering existing indices. So ‘no’ is the simple answer to your question.”
“But the commitment to providing a net zero-aligned index by default – i.e. regardless of market demand for such an index – is a key step to facilitate the flow of capital that has already been committed to net zero,” they added.
In other DWS-related news, the asset manager saw €5bn in net inflows to its ESG funds last quarter – a 20% increase on Q2. Inflows into funds categorised under either Articles 8 or Article 9 of the EU’s new Sustainable Finance Disclosure Regulation represented 40% of the asset manager’s total net inflows over the period.
The increase suggests that investors have not been put off by allegations made recently by former Group Sustainability Officer Desiree Fixler that DWS exaggerated the volume of its assets subject to “ESG integration”, which sparked investigations by the US Securities and Exchange Commission and German financial regulator BaFin. DWS denies the accusations, and no investors have publicly announced they are pulling out of the firm as a result of the allegations.