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Investors have been increasingly eager in recent years to deploy their money in a way that supports sustainability and aligns with their values — a trend that, in theory, could leverage capitalism to help combat climate change and fight society’s ills.
But has the rapid rise of funds that prioritize environmental, social and governance — or “ESG” — issues actually helped achieve these goals? Or has it mostly amounted to a sleight of hand, as banks and investment managers repackage old products and append a “green” label so they look more desirable?
A crackdown by regulators is forcing the investment community to grapple with these questions, generating uncertainty about the future of Wall Street’s ESG fervor.
What’s happening: German prosecutors raided the asset manager DWS and the headquarters of Deutsche Bank, its majority owner, on Tuesday over allegations of “greenwashing.” DWS faces probes on both sides of the Atlantic after a whistleblower claimed it had overstated its green credentials and misled investors.
“The measures taken by the public prosecutor’s office are directed against unknown persons in connection with greenwashing allegations made against DWS,” Deutsche Bank said in a statement. “In response, DWS has stated that it has cooperated continuously and comprehensively with all relevant regulators and authorities in the past and will continue to do so in the future.”
Asoka Woehrmann, the CEO of DWS, announced his resignation on Wednesday.
The raid came just one week after the US Securities and Exchange Commission charged BNY Mellon’s investment management division over “misstatements and omissions” about its ESG processes.
The SEC claimed that between July 2018 and September 2021, BNY Mellon “represented or implied in various statements” that certain investments “had undergone an ESG quality review, even though that was not always the case.”
BNY Mellon agreed to pay a $1.5 million fine but did not admit or deny the findings, according to the agency.
It’s not just the suits that are coming down hard on ESG. Tesla CEO Elon Musk recently tweeted that ESG “is a scam” that’s “been weaponized by phony social justice warriors.”
His criticism came after Tesla (TSLA) was kicked out of the S&P 500’s prominent ESG index. S&P Dow Jones Indices said the electric carmaker’s ESG standing had been affected by claims of racial discrimination and poor working conditions at its Fremont manufacturing plant.
Musk is not considered an ESG expert and has plenty of critics. But the inclusion of ExxonMobil (XOM) in the S&P index’s top holdings did raise eyebrows.
Looking ahead: Investment managers maintain that the ethos behind ESG investing isn’t going away, especially given the urgency of the climate crisis.
“We are going into a world of climate transition and we’ve got to get our clients’ capital on the right side of that, in the right ways,” a senior asset management executive at a top Wall Street bank told me at the World Economic Forum in Switzerland last week.
Still, the executive acknowledged that there could be better standards to ensure consistency across the industry, and that the current classification of ESG products is often unhelpful.
“It is incumbent on managers to do their own work in this space,” they said.
Janet Yellen admits she was ‘wrong’ on inflation
US Treasury Secretary Janet Yellen admitted Tuesday she had failed to anticipate how long high inflation would plague American consumers as the Biden administration tries to defuse a mounting political risk.
“I think I was wrong then about the path that inflation would take,” Yellen told CNN’s Wolf Blitzer when asked about comments from 2021 that inflation posed only a “small risk.”
Since then, prices have continued to rise for a variety of reasons, including persistent supply chain snarls, the Omicron variant of the coronavirus and Russia’s invasion of Ukraine.
“There have been unanticipated and large shocks to the economy that have boosted energy and food prices and supply bottlenecks that have affected our economy badly that I at the time didn’t fully understand, but we recognize that now,” Yellen said.
Step back: The admission was the latest indication that the administration’s expectations that the US economy would normalize have been thrown into disarray. Yellen and other White House officials once framed inflation as a temporary side-effect of the economy returning to normal following the pandemic.
Now, it remains uncomfortably high, though there are signs it may have peaked. Economists are increasingly warning that a recession could be on the cards next year as the Federal Reserve hikes interest rates and high food and fuel prices threaten consumer spending.
What happens next: The Biden team has emphasized that fighting inflation is mostly the Fed’s job now.
“The Federal Reserve has a primary responsibility to control inflation,” President Joe Biden said in an op-ed in the Wall Street Journal on Monday.
Biden met with Powell at the White House on Tuesday. He stressed that he wouldn’t interfere with the central bank’s independence at a crucial juncture.
The big experiment that could rattle financial markets
On Wednesday, the Federal Reserve will kick off a process it’s never undertaken in its 109-year history: In a bid to fight inflation, it will begin shrinking the size of its $8.9 trillion balance sheet.
Following the shock from the Covid-19 pandemic, the central bank printed money and bought an unprecedented volume of financial assets like government bonds to protect the economy and keep money flowing through markets.
Now, it’s reversing course and starting to trim its holdings. Along with interest rate increases, it’s an important tool in the Fed’s toolkit to fight price increases while attempting to avert a recession.
But it’s not a given that it will succeed, especially given the ambitious schedule it’s laid out. Last time the central bank went into selling mode, it caused significant market turbulence.
Remember: After gobbling up government bonds and mortgage securities during the Great Recession, the Fed started reducing its balance sheet — which then contained a comparatively paltry $4.5 trillion in assets — in late 2017. It halted the process in 2019 as markets swooned.
“They are winging it, absolutely,” a senior rates strategist at Bank of America said at the time.
This time around, the circumstances are even more complicated, given the ongoing impact of the pandemic and the war in Ukraine. In the meantime, jittery investors are remaining on the sidelines, unsure of whether the Fed can pull off the maneuver.
Chewy (CHWY) and GameStop (GME) report results after US markets close.
- The ISM Manufacturing Index for May arrives at 10 a.m. ET.
- The latest data on US job openings also posts at 10 a.m. ET.
Coming tomorrow: OPEC meets by videoconference as Europe’s oil embargo puts pressure on prices.