Industry Updates

ETF Wrap: ESG needs a guinea pig

A CEO’s comments on ESG investigations, direct indexing and ETF shadow trading made headlines this week

Jamie Gordon

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Regulating complex issues takes time, trial and error, and even test subjects, to see how new rules and their enforcement work in practice. In the case of ESG in Europe, this test subject is DWS, according to its CEO Stefan Hoops.

Following results which showed clients pulled €19.9bn from the asset manager in 2022, Hoops told analysts his firm had become a “guinea pig in the public eye for how other managers should set up their ESG”.

He added DWS would take the “unusual step” of sharing its internal investigation into its own ESG practices to give investors and other asset managers peace of mind, however, he noted the possibility his firm might be fined among other “adverse” outcomes.

The ongoing investigation into DWS, which has seen the firm voluntarily surrender more than three million documents, started after its former group sustainability officer Desiree Fixler expressed concerns about €900bn of its assets being declared as ESG-aligned in 2020.

Soon after, German and US regulators began probes into the German asset manager, culminating in 50 Frankfurt public prosecutor, BaFin and the Federal Criminal Police Office (BKA) personnel raiding the offices of DWS and its parent company Deutsche Bank last June.

The same day, former CEO Asoka Woehrmann stepped down. COO Mark Cullen, CIO Stefan Kreuzhamp, head of communications Adib Sisani and other ESG and strategy staff subsequently either departed or were demoted, according to Oxford Saïd Business School Professor Robert Eccles.

This materially damaging series of events for Germany’s largest asset manager has acted as a warning signal to the industry that regulators will not be idle when it comes to accusations of greenwashing.

While in this case law enforcement happened on a single country level, asset managers in Europe voluntarily downgraded more than $57bn of assets from being classified as ‘dark green’ Article 9 ahead of ‘level two’ of the EU’s Sustainable Finance Disclosure Regulation (SFDR) being implemented, showing no-one wants to be caught out and accused of over-promising on ESG after years of giddiness.

The outcomes of German regulators’ investigations into DWS will also hopefully inform others on how to – or how not to – investigate suspected greenwashing, as well as providing some in-the-field case law for what is identified as greenwashing. Until now, what is considered ESG or greenwashing is something regulators across the world have struggled to codify.

Direct indexing pending

Years after being described as an “ETF killer” and direct indexing has yet to take off, with its main selling point in the US so far being its use in tax loss harvesting. However, the technology was given another vote of confidence this week as Vanguard CEO Tim Buckley told attendees of Exchange ETF his firm will “invest heavily” in direct indexing.

Buckley also reiterated the tax argument, noting “there are huge tax benefits for a lot of investors in using direct indexing”, according to Pensions & Investments.

It is worth noting this is not Vanguard’s first foray into the technology. This came in October 2021 when it purchased Just Invest and its direct indexing platform Kaleidoscope.

While direct indexing has been available to wealthy investors for years, Cerulli Associates estimated last year it may grow to represent a third of retail separate accounts by 2026.

ETFs and shadow trading

New research, titled Using ETFs to conceal insider trading, revealed insiders are engaging in ‘shadow trading’, using ETFs to carry out $2.75bn of front-run trades ahead of mergers and acquisition announcements over the thirteen years to 2021.

Interestingly, this number only reflects ETFs targeting US companies and insider trading on M&A news, while excluding other price sensitive events including company earnings.

In the latter six years of the study, shadow trading in the ETFs examined totalled $360m per year, with a particular focus on products targeting industries where insider information has greater impact. These included tech, healthcare and industrials ETFs from BlackRock and Vanguard. 

ETF Wrap is a weekly digest of the top stories on ETF Stream

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