German asset manager DWS has settled with the US Securities and Exchange Commission for $19 million over claims it exaggerated the extent of ESG integration in its investments.
An SEC statement said that DWS Investment Management Americas, the firm’s US subsidiary, had made “materially misleading statements” about its controls for incorporating ESG factors into research and investment recommendations for ESG-integrated products.
From August 2018 to late 2021, the SEC said, DWS marketed itself as an ESG leader, but “failed to adequately implement certain provisions of its global ESG integration policy as it had led clients and investors to believe it would”. The firm also failed to adopt policies and procedures to ensure its public statements about ESG were accurate, the SEC said.
“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,” said Sanjay Wadhwa, deputy director of the SEC’s enforcement division and head of its climate and ESG taskforce.
“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.”
Without admitting or denying the SEC’s findings, DWS has agreed to pay $19 million as a penalty and has agreed to a cease-and-desist order and censure.
A spokesperson for DWS told Responsible Investor the firm was pleased to have resolved matters which “relate to certain historic processes, procedures and marketing practices the firm has since addressed”.
“The SEC ESG order, following an extensive two-year examination, finds no misstatements in relation to our financial disclosures or in the prospectuses of our funds. We have consistently stated that we stand by our financial disclosures and disclosures in our fund prospectuses,” the spokesperson continued.
“The order also makes clear that there was no intent to defraud, and the weaknesses identified by the SEC are in relation to processes and procedures that the firm has already taken steps to address.
“The order also does not find that DWS Investment Management Americas (DIMA) staff were not integrating ESG factors into the investment process. Instead, the order focuses on the fact that DIMA lacked processes and procedures to evidence that such integration was documented in a consistent manner.”
The dispute over DWS’s ESG integration was first brought to light by former group sustainability officer Desiree Fixler. According to Fixler, she was fired by the firm after raising internal concerns. She subsequently went public with the claims.
German police raided the offices of both DWS and parent Deutsche Bank in May last year as part of a separate probe by BaFin.
A spokesperson for the German regulator said that it was unable to impose its own sanctions as the public prosecutor in Frankfurt had taken over the investigation. It declined to comment on the SEC’s actions.
DWS’s chief executive, Asoka Woehrmann, resigned the day after the raids and was replaced by Stefan Hoops, formerly head of Deutsche Bank’s corporate banking arm. In its Q2 results this year, DWS said it had set aside €27 million to cover settlements for the allegations.
The penalty paid by DWS is the largest yet in an ESG-related enforcement action against an asset manager by the SEC.
A former lawyer at the SEC told RI this month that he expected penalties for ESG violations to increase in size.
Kurt Gottschall, who spent 22 years at the SEC and headed up its Denver office, said the “leadership team at the SEC, particularly in the enforcement division, has been very public about their desire to ratchet up penalties”.
Gottschall, now a partner at law firm Haynes Boone, said he expected more penalties in the eight-figure range, noting that both Goldman Sachs Asset Management and BNY Mellon Investment Adviser had received fines larger than $1 million while compliance violations typically result in the low hundreds of thousands.
This article was updated after publication to add comment from BaFin.