- Smart Integration focuses on opportunities and risks, replacing the common and rather backward-looking industry practice of excluding entire sectors whose sustainability practices are poor.
- Using its ESG engine, DWS can identify potential risks - such as serious breaches of international standards - and enter into targeted dialogue with companies to exert a positive influence on their sustainability practices.
- This creates greater opportunities for DWS to contribute to a more sustainable economy through responsible investment.
Sustainable investment is in vogue. More and more investors want something meaningful to happen with their money. They want to invest in companies that meet certain environmental and social standards and are well managed (ESG). And they want to make sure that their money does not go to the "wrong" people: companies with disreputable business models, for example, or notorious polluters. It is not always easy for asset managers and investment companies to meet these requirements.
"The devil is in the detail," says Petra Pflaum, CIO for responsible investment at DWS. "Some companies that look green or sustainable at first glance don’t stand up to close scrutiny. On the other hand, there are always companies among the supposed sinners that are honestly trying very hard to improve. It would be counterproductive to exclude people who are actually making a special effort when it comes to ESG.“
DWS has developed the ESG Engine to obtain as accurate a picture as possible of the quality of individual investments such as shares or bonds in ESG terms. The database uses data from five rating agencies specialised in different ESG criteria to create its own ESG ratings, lists of best performers and possible warning signals. These provide analysts and fund managers with an additional criterion when making investment recommendations and decisions.
Committee for Responsible Investing
However, data alone are not enough to make an informed decision. In addition to integrating ESG into its active investment process, DWS is therefore now supplementing its existing practice with "Smart Integration". The company’s revised analysis process is supported by a Committee for Responsible Investment, which was created for this purpose. It comprises experts from the CIO Office for Responsible Investment, equity and bond analysts, and representatives from relevant risk functions as well as compliance. The new Committee is chaired by Petra Pflaum, CIO for Responsible Investment.
"In the past, investors have concentrated on excluding certain sectors from the investment process that are considered controversial, such as tobacco, coal and palm oil,“ says Pflaum. "However, it has become apparent that the blanket exclusion of entire sectors is often arbitrary and ignores some important aspects of sustainability risks. Furthermore, exclusions are based on past data. They are backward-looking, which means the opportunity to cooperate with issuers is lost."
Careful case-by-case assessments replace blanket exclusions
DWS has thus made a conscious decision not to follow an approach with automatic sector-based exclusions. Instead, it will in future carefully examine climate laggards and companies that have violated international standards. The newly formed Committee for Responsible Investment will make the final decision on whether managers of DWS‘s actively managed mutual funds licensed in Germany may invest in a company with potentially high sustainability risks. Alongside signals from the ESG Engine, the committee can also draw on other criteria, including, for example, new commitments, transparency, the issuer's sustainability and climate change goals, and critical topics from management meetings. Following the committee’s review, it may decide to prohibit or restrict further investments, to remove the restriction imposed by the ESG Engine or even to sell existing holdings. However, the latter should be a last resort.
"Dialogue with companies on corporate strategy is the most effective tool we have for making a positive impact on ESG practices," says Pflaum. "The proactive Smart Integration approach now gives us the opportunity to engage actively with companies and initiate measures for improvement."
“Smart Integration“ boosts demand for ESG quality
Something else is important to Pflaum too: being able to react more flexibly to certain sustainability risks does not mean that DWS is lowering its ESG standards. To the contrary. "We are raising the bar and examining companies even more closely with our new panel of experts, " says Pflaum. "We are also moving in the right direction to comply with future regulatory requirements.".