ESG Enforcement Tracker

Key facts:

In September 2023, the SEC announced settled charges against registered investment adviser DWS Investment Management Americas, Inc (DIMA), a subsidiary of Deutsche Bank AG, in two separate enforcement actions:

• one regarding misstatements on its ESG investment process; and
• the other concerning the failure to develop a mutual fund anti-money laundering programme.

DIMA agreed to a cease and desist order, paying a total fine of US$25 million, of which US$19 million related to the ESG breach.

In relation to the ESG enforcement action, the SEC alleged that, from August 2018 to late 2021, DIMA – which marketed itself as being a leader in ESG – had made materially misleading statements about its controls for incorporating ESG factors into research and investment recommendations for ESG-integrated products for certain actively managed ESG-integrated mutual funds and separately managed account strategies advised by DIMA.

Specifically, DIMA failed to implement provisions of the company’s global ESG Integration Policy as it had led clients and investors to believe it would. In 2019, a version of the ESG Integration Policy was uploaded on DWS Group GmbH & Co. KGaA (DWS)’s US website through which DIMA marketed its advisory services.

In doing so, DIMA represented that through this policy its research analysts were required to include “financially material and reputation relevant ESG aspects into valuation model[s], investment recommendations and research reports and consider material ESG aspects as part of their [i]nvestment decision”. This was misleading in that DIMA failed to adequately implement the policy’s requirements for research and monitoring compliance, nor did DIMA adopt and implement reasonable policies and procedures to help ensure that its public representations about the ESG Integration Policy were not misleading.

In addition, DIMA made various representations about a proprietary tool called the ESG Engine, to which its investment team had access. The ESG Engine aggregated data from multiple ESG third-party vendors to provide a letter rating from A to F for thousands of issuers according to six rating categories, such as overall ESG quality, carbon and water risk, and controversial business conduct. DIMA made various representations about the use of the ESG Engine including that “Every DWS investment team uses it to make investment decisions for their portfolio”.

However, DIMA did not have any formalised process to assess whether its investment professionals had in fact consulted the ESG Engine’s ratings when they made investment recommendations or decisions for DIMA’s ESG integrated products. The company similarly lacked controls to ensure that material ESG risk factors were considered in research notes. When the issues were identified, DIMA took remedial steps to address these, including putting in place necessary controls.

The SEC alleged that the ESG-related conduct amounted to three violations of the Investment Advisers Act of 1940 and related rules, namely: section 206(2) (the prohibition on investment advisers engaging in “any transaction, practice or course of business which operates as a fraud or deceit upon any client or prospective client”); section 206(4), rule 7 (relating to the adoption and implementation of written policies and procedures to prevent violations of the Act and rules); and, section 206(4), rule 8 (relating to untrue statements made by investment advisers to investors/prospective investors in pooled investment vehicles).