A unit of Deutsche Bank has agreed to the entry of a cease-and-desist order and to the payment of a $19 million penalty in connection with an SEC enforcement action in which the agency alleged that the unit had made materially misleading statements about its use of ESG factors into its research and investment recommendations. The ESG-related enforcement action was accompanied by a separate anti-money laundering (AML) enforcement action against the unit, Deutsche Bank’s New York-based investment advisor subsidiary, DWS Investment Management Americas (DWS), in which DWS agreed to pay a separate $6 million penalty. The ESG-related action, which apparently involved the SEC’s Climate and ESG Task Force, highlights the ways in which companies seeking to be proactive on ESG-related issues can attract claims. The action also underscores the fact that the SEC is scrutinizing ESG-related disclosures.

The SEC’s September 25, 2023, press release about the two enforcement actions can be found here. The SEC’s September 25, 2023, cease-and- desist order in connection with the ESG matter can be found here.

Background

According to the SEC’s cease-and-desist order, beginning in August 2018, through at least late 2021, DWs had marketed itself to clients and prospective clients, and to investors and prospective investors in the funds it managed, as a leader in ESG, including through its marketing of the ESG Integrated Products.  For example, in 2019, a DWS 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.”

However, the cease-and-desist order found, DWS failed to adopt and implement written policies and procedures reasonably designed to prevent violations of the Advisers Act and the rules thereunder.  Specifically, the order alleges, DWS lacked policies and procedures necessary to ensure the representations it made on its website, in response to RFPs, or in other marketing materials concerning its ESG integration process were not materially misleading.  To this end, the order contends, it lacked policies and procedures to ensure its ESG Integration Policy was consistently followed by its investment professionals, and to confirm whether investment professionals consulted the ESG Engine, documented ESG factors in research notes, and incorporated ESG issues in valuation models and investment recommendations for the ESG Integrated Products.

The cease-and-desist order recites that in anticipation of the enforcement proceedings, DWS submitted an offer of settlement, which the agency determined to accept. Without admitting or denying the SEC’s allegations, DWS agreed to the cease-and-desist order, censure, and a $19 million penalty. In the accompanying AML-related enforcement proceeding, DWS, again without admitting or denying the allegations, agreed to a cease-and-desist order and a $6 million penalty.

The SEC’s press release about the two settlements quotes the head of the SEC’s Climate and ESG Task Force as saying that “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. 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.”

Discussion

The SEC’s press release and cease-and-desist order don’t use the term, but the allegations against DWS seem to be in the nature of greenwashing – that is, that the company was trying to build up its ESG credentials and to use its ESG-related offerings to try to make itself look virtuous and to attract funds from ESG-focused investors. In addition, the SEC press release also does not explicitly say it, but the quotation in the press release from the head of the agency’s Climate and ESG Task Force makes it look that this enforcement action was at least in part the product of the task force’s efforts.

From my perspective, this enforcement action and its settlement is yet another example of the ways in which the companies that are getting hit with ESG-related claims are not the ESG laggards, but rather the companies that have tried to portray themselves as proactive on ESG-related issues. This action is one of several actions over the last couple of years in which the defendant company’s touted ESG efforts fall short of representations or failed to live up to stated standards.

For example, all of the enforcement actions in which the SEC’s Climate and ESG Task Force has been involved show this same pattern. For example the first Task Force’s actions involved alleged misrepresentations by the Brazilian mining company, Vale, made in the company’s sustainability report (as discussed here).  The task force’s action against BNY Mellon – similarly to the action described above pertaining to Deutsche Bank’s investment adviser subsidiary – involved allegations pertaining to the bank’s ESG funds, as described here. In each of these cases, the allegations were not that the target companies were ESG laggards but that they had claimed too much in trying to establish their ESG credentials.

If nothing else, the SEC’s actions, including the actions in which its Climate and ESG Task Force was involved, shows that there is a cop on the beat and that the agency is actively monitoring ESG disclosures. That said, however, the specific action against DWS was primarily the product of a whistleblower report. As discussed in a Wall Street Journal article at the time (here), Desiree Fixler, DWS’s sustainability chief, apparently was fired after contesting statements in the firm’s annual report about its ESG capabilities. Her allegations became public, among other things through the Journal article, ultimately leading to the SEC enforcement action.