DWS sell-off ‘excessive' as greenwashing in doubt, Citi analysts say

The market panic set off by greenwashing allegations against Deutsche Bank investment arm DWS Group was "excessive," with little to suggest regulators will be able to prove the firm did anything wrong, according to a report by analysts at Citigroup.

"We struggle to see how regulators can hold DWS to account, because sustainability requirements are subjective, making it hard to enforce, even if there was wrongdoing," a group of analysts at Citi led by Nicholas Herman said in a client note published on Monday. "DWS should overcome this issue and its strong ESG focus should pay off over the medium term."

DWS' share price has yet to recover from a sell-off that hit in late August as the market learned of probes by German and U.S. regulators into claims it inflated its environmental, social and governance assets. The allegations, from DWS' former sustainability head, Desiree Fixler, have been vehemently rejected by the firm. But shareholders appear so far to have been unmoved by the denials.

Meanwhile, investors have learned that one probe extends further into the upper echelons of Germany's financial elite than previously known. The country's securities regulator Bafin has contacted DWS parent Deutsche Bank about the role played by the lender's president, Karl von Rohr. He also chairs DWS' supervisory board, and in that capacity signed off on the annual report that's now being investigated for alleged greenwashing.

The DWS probes represent a milestone moment for the asset management industry as regulators show they're ready to take an aggressive stance on inflated ESG claims. News of the investigations led fund managers across Europe to review their portfolios and marketing material to ensure they're not vulnerable to similar probes, people familiar with the matter have said.

But the DWS case also exposes a potential weakness in European rules that are intended to combat greenwashing, according to Bloomberg Intelligence. The Sustainable Finance Disclosure Regulation, enforced in March, still leaves a lot of room for interpretation and the industry won't get clarity until the middle of next year on how to approach some key definitions.

The current timeline for clarifications, which represents a six-month delay compared with an original deadline, "exposes (asset) managers to greater legal risk, we believe," said Bloomberg Intelligence analysts Sarah Jane Mahmud and Shaheen Contractor.

"Managers are operating in a vacuum as to how they should categorize their funds," the BI analysts wrote on Monday. What's more, "the delay suggests the new standards will be highly complex and compliance will take more time."

Other jurisdictions are far behind Europe in formulating ESG regulations, creating even more uncertainty for the industry. The upshot, according to the Citi analysts, may be that asset managers adopt less ambitious ESG goals rather than face the risk of getting caught making green claims that might be difficult to substantiate once the rules are finalized.

Should regulators in the U.S., for example, opt to take action against DWS, that "could disincentivize other firms from providing ESG solutions and disclosures for fear of being caught by unclear regulations," the Citi analysts said. "That would not be a desirable outcome," they said.

Meanwhile, Citi noted "robust" asset flows at DWS in August, but said it's too early to tell whether the probes have dented investor appetite for the asset manager's ESG funds.