Sometimes the financial world tends to use somewhat flat imagery. Large securities funds like to operate there as “flagship funds”, with which investors can supposedly weather stormy times in the capital markets safely. The Deutsche Bank DWS subsidiary also has more than one flagship fund: with assets under management of nearly 18 billion euros, the “Top Dividend” fund is one of the most financially heavy equity funds. ‘Germany. The fund’s performance relative to similar investments has recently left a lot to be desired, but this has yet to lead investors to withdraw massive sums of money.
The highest dividend not only raises questions about its performance, but it’s also interesting: how environmentally friendly is this fund? DWS says the fund manager has been using a concept called ‘Smart Integration’ since July 2020. This means DWS fund managers are also carefully considering the risks that may arise from climate change, for example, and rule out particularly controversial companies.
The question of whether this is really true is currently not only relevant for fund investors. DWS is suspected of portraying itself to the outside world as being significantly greener than it is according to some high-ranking employees. The US regulator and German financial regulator Bafin are currently examining whether the asset manager has been too lax with the criteria for sustainable investments. It may also be incorrect information in the annual report.
Externally ambitious, internally controversial
The investigation is still in its early stages and the outcome is uncertain. They were sparked by statements by former DWS sustainability boss Desiree Fixler, who was fired in March after just six months. She publicly made serious allegations against DWS, which the company dismissed in a statement last week. The main question is how much of the assets under management are truly “ESG” – but also whether DWS lives up to its own claim to be a leader in this area. According to SZ information, several managers had questioned this internally, while DWS boss Asoka Wöhrmann painted a different picture externally. ESG stands for Environment, Social and Governance. It is about investing more in companies that are particularly less harmful to the environment and society and which are well managed. Surveys are now likely to have consequences far beyond DWS, as other funders must also consider whether their external presentation in terms of sustainability matches reality.
In the case of DWS ‘flagship fund, Top Dividend, aspirations and reality don’t quite align: According to the latest semi-annual report, the fund has invested in several companies which are likely difficult to come to terms with with ESG claims. On the sustainability side, DWS explicitly mentions tobacco as a business sector “whose impact on society is assessed negatively”, but the main dividend is investing more than 800 million euros in the same tobacco companies (British American Tobacco, Philip Morris, Imperial Brands). There are also positions in the Australian-British raw materials group BHP (dirty mines) or in the armaments company Raytheon (killer drones). According to the rating agency Sustainalytics, all of these stocks present a high ESG risk. The non-governmental organization Facing Finance also writes about Raytheon, claiming that the arms company is one of the biggest exporters to controversial countries in the Middle East and Africa. “If this fund is counted as part of the ESG, then it would truly be the most environmentally friendly greenwashing ever,” said a DWS insider.
A spokesperson for the DWS said on Tuesday that the allegations of a former employee were dismissed. The definition of “ESG integration” is based on industry standards – this means “that portfolio managers have non-financial information (ESG) about companies that may be invested”. In other words: fund managers must be able to access this data. According to DWS, only funds that have the abbreviation in their name are managed according to ESG criteria.
Bad ratings from independent rating agencies
DWS is still a long way from claiming to make ESG data the norm in all products. In a large ESG study from November 2020, the fund rating agency Morningstar also had mainly criticisms: the two funds “DWS Top Dividend” and “DWS Invest Top Dividend” would be sold with the Smart Integration approach, although ‘they do not bring much to ESG would admit. The funds initially excluded F companies – this is the second worst rating – but re-authorized them if a committee gave the go-ahead.
Overall, Morningstar has criticized DWS’s ESG progress. It is true that “all DWS fund managers have access to ESG research” and analysts must include ESG considerations in their analyzes. “However, portfolio managers have a lot of leeway when it comes to weighting ESG factors when choosing stocks, managing risk or building the portfolio.” Therefore, the degree of ESG integration can vary considerably depending on the fund manager and mandate. According to Morningstar, the priority for DWS Top Dividend is to invest in high dividend yielding stocks. The fund manager has invested in stocks that offer high returns, although they are associated with increased ESG risk.
Sales-experienced Wöhrmann praised DWS shortly after the Morningstar study was published: DWS has an “approach to integrating sustainability aspects that is unique in our industry”. It goes way beyond previous industry standards.
But what prompted the DWS to presumably present itself as greener than it is? It may just be more profitable. It is therefore probably worthwhile not to shake up the Top Dividend strategy, but to explain an ESG integration somewhere. According to information from SZ, the fund is also popular internally due to its relatively high sales commissions. This means that DWS receives continuously higher income from the banks that sell the funds. Without funds like Top Dividende, the number of assets already labeled “ESG-integrated” would have been significantly lower. It wouldn’t sound so good then.