The Securities and Exchange Commission on Sept. 25 levied a $19 million fine against Deutsche Bank subsidiary DWS Investment Management Americas Inc. (DIMA or DWS) for misstatements regarding its environmental, social and governance (ESG) investment process.
The SEC also charged DWS with another $6 million in fines concerning its failure to develop a mutual fund Anti-Money Laundering (AML) program, resulting in a total of $25 million in penalties.
Concerning the ESG enforcement action, the SEC’s order finds that DIMA made materially misleading statements about its controls for incorporating ESG factors into research and investment recommendations for ESG integrated products, including certain actively managed mutual funds and separately managed accounts.
The order finds that DIMA marketed itself as a “leader in ESG” that adhered to specific policies for integrating ESG considerations into its investments. For example, the order notes that, in 2019, “a DIMA senior leader described in a public marketing piece that ESG is ‘top of mind throughout our organization’ through use of a proprietary ‘DWS ESG Engine’ that is ‘the centerpiece of our commitment to integrating ESG considerations into our investment process [and] [e]very DWS investment team uses it to make investment decisions for their portfolio.’”
The SEC notes, however, that from August 2018 until late 2021, DIMA failed to adequately implement certain provisions of its global ESG integration policy as it had led clients and investors to believe it would.
What’s more, the order finds that DIMA also failed to adopt and implement policies and procedures reasonably designed to ensure that its public statements about the ESG integrated products were accurate.
“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,” Sanjay Wadhwa, Deputy Director of the SEC’s Division of Enforcement and head of its Climate and ESG Task Force, said in a statement. “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,” Wadhwa added.
In the ESG misstatements action, the SEC’s order finds that DIMA violated Sections 206(2) and 206(4) of the Investment Advisers Act and Rules 206(4)-7 and 206(4)-8 thereunder. Without admitting or denying the SEC’s findings, DIMA agreed to a cease-and-desist order, censure, and the aforementioned $19 million penalty in the ESG misstatements action.
DWS Responds
For its part, DWS issued a statement in response to the SEC’s enforcement actions. “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,” the statement notes, adding that “We have consistently stated that we stand by our financial disclosures and disclosures in our fund prospectuses.”
DWS also contends that the Order “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.” To that end, the firm notes that the Order does not find that DIMA staff were not integrating ESG factors into the investment process, but instead focuses on the fact that “DIMA lacked processes and procedures to evidence that such integration was documented in a consistent manner.”
