Deutsche Bank AG's asset-management arm, DWS Group, are under investigation by US Securities and Exchange Commission and federal prosecutors for allegedly overstating its ESG credentials across its $1tn fund range, according to reports.
The landmark probe - which will be be heavily scrutinised by the global fund management industry - comes after the DWS's former head of sustainability acted a whistle-blower in an interview with The Wall Street Journal, saying that the company had overstated how much it used sustainable investing criteria to manage its assets.
Assets in ESG funds have surpassed $2 trillion globally in the second quarter of 2021, almost tripling in size in the last three years, according to Morningstar statistics.
As the rush to meet demand for ESG and sustainable investment products, accusations of greenwashing have become commonplace and global regulators have been looking into how to ensure that investors are not misled.
The DWS probes are in early stages, have begun citing documents from DWS's former head of sustainability, Desiree Fixler, who said the firm struggled with its strategy on environmental, social and governance investing and, she claims, do not give an accurate picture to investors.
All parties involved, other than Fixler, have declined to comment at this stage. The WSJ, citing unnamed sources, has also reported that federal prosecutors in Brooklyn, New York, were looking into the matter. A spokesman for the US attorney's office in Brooklyn, which is handling the probe, declined to comment, when asked. Separately, a spokesman for the SEC also declined to comment.
DWS have said tha the firm doesn't comment on questions related to litigation or regulatory matters and a spokesman for Deutsche Bank also declined to comment.
Fixler was asked to leave the firm in April 2021 after working there for only six months, prior to joining DWS, Fixler was a portfolio manager and impact investing director at US alternative investment firm Zais.
Fixler told the WSJ after she left DWS that the Frankfurt-listed asset manager had misled investors by claiming that more than half of its assets under management were subject to an ESG integration process.
DWS has previously told investors that ESG concerns are at the heart of everything it does and that its ESG standards are above the industry average. In its 2020 annual report - released in March - it said that that more than half of its $900bn in assets at the time were invested using a system where companies are graded based on ESG criteria.
Fixler, who at at the time DWS's sustainability chief, told the Wall Street Journal that she believed DWS misrepresented its ESG capabilities, the reports stated
A DWS spokesman at the time that the firm stood by its annual report and that an investigation by a third-party firm found no substance to Fixler's allegations. He said standards for defining ESG assets are constantly evolving, and that DWS has been seen by the market as being more conservative than most of its competitors in the definition, the report said.
The probe is another setback for Deutsche Bank, which owns a majority of DWS, via a separately listed company in Germany. The bank has reached several settlements with authorities and has been trying to convince investors that its legal woes are behind it.
In January, the bank agreed to pay $130m to resolve separate government investigations into a commodities-fraud scheme and accusations that the bank violated bribery laws in an effort to win business.