DWS has announced a new approach to integrating environmental, social and governance (ESG) factors that it said will strengthen its stewardship practices.
Dubbed ‘Smart Integration’, it represents a move to a systematic, committee-based approach, with a panel of experts in place who will advise portfolio managers on investments in companies identified as “high risk” – previously ESG integration was solely up to individual portfolio managers.
The panel, or committee, is chaired by the chief investment officer for responsible investment, Petra Pflaum, and attended by the heads of corporate governance, ESG integration and ESG data, the research head for fixed income and equity, the heads of investment risk, non-financial risk, and compliance, and one of the responsible investment specialists from DWS’s responsible investment centre.
The committee aims to meet weekly, but can also gather on an ad hoc basis, for example when there is a bond issue.
According to Robin Braun, the responsible investment specialist that sits on the panel, the issuers that come up for discussion are those that are assessed as critical on the basis of analysis by DWS’s “ESG Engine” – an algorithm integrated into the portfolio management system that incorporates backward and forward-looking data.
Analysts and/or portfolio managers are then asked to present an investment case to the panel based on an “integrated analysis of financial and non-financial aspects” of those companies.
“It’s a data-inspired exercise plus a human element,” said Braun.
Explaining the new committee-based approach to IPE, he also referenced DWS’s relatively new status as a listed asset manager: “Now that we’re a listed company, we are more open to scrutiny and NGO criticism for being invested into certain types of companies,” he said.
Not just climate
The issuers DWS is looking out for in particular are those with “high climate transition risks” and those that severely violate international norms.
Braun said the asset manager deliberately was not only taking into account climate change considerations, but that its analysis involved a “very comprehensive assessment of companies if they’ve done anything wrong, and what the risk is that this occurs structurally”.
The identified companies are then ranked by level of risk exposure, with engagement pursued with high-risk companies as advised by the panel, and exclusion from the DWS investment universe as a last resort if companies fail to improve enough to meet the asset manager’s expectations.
‘Dialogue is our most powerful tool’
In a statement announcing the new approach, Asoka Woehrmann, CEO of DWS, said: “The dialogue with companies on corporate strategy – engagement – is the most powerful tool we have as a fiduciary asset manager to make a positive impact on ESG practices.
“I am proud that with the introduction of ‘Smart Integration’ DWS has set up an own overarching taxonomy to apply its influence. This is a major step forward towards becoming an ESG leader in our industry.”
Braun explained that DWS closely assessed the top-down, controversy-driven sector exclusions that it observed “various” investors applying, but that it considered that this meant “either you exclude anything that people might deem controversial so anything controversial results in exclusions which are too comprehensive for an asset manager, or it’s arbitrary”.
”We can only engage with firms and vote at AGMs if we hold shares or are entitled to speak with the firm as bondholders,” he said.
DWS said it would initially apply its new approach to around a fifth of its €700bn global assets under management, targeting non-ESG focused funds in particular. ‘Smart Integration’ would then in the course of a year ”be further rolled out to ensure greater ESG integration across the broader investment platform of DWS”.
According to equity researchers at Credit Suisse recently selected, DWS has previously disclosed having €451bn in ESG-integrated assets under management, and €70bn in ”ESG-dedicated” assets under management.
In asset management research published last week they said they saw “ESG investments as an important differentiator” in their asset management coverage universe, and that DWS was in their view set to outperform.