Our sustainability approach
Since the adoption of the Paris Climate Agreement in 2015, we have experience an increasing momentum in sustainable finance by clients, investors, and regulators. During this agreement, the financial sector was identified as a critical lever to reach global climate targets within the required time horizon and financial regulators around the world became active in driving new market standards promoting sustainable finance. Today, we believe that sustainability is the most relevant business opportunity in 2020 and beyond. Therefore, we work towards putting sustainability in the sense of environmental, social and governance topics (ESG) at the core of everything we do.
Our new Group Sustainability Office will further drive our sustainability roadmap looking forward which is aligned to what is important to our stakeholders including clients, employees and wider society as well as governmental and non-governmental organisations (NGOs). To balance between differing interests, we will continuously engage in a constructive dialogue with our stakeholders. We anticipate that there has never been a more pressing need for a collaborative approach to global challenges and that the sustainability risks and opportunities ahead of us are highly connected.
Our fiduciary responsibility and approach to Sustainable Finance
The asset management industry plays an increasingly important role in society, including making the financial system more sustainable. This means integrating ESG and long-term-sustainability topics such as climate risk into investment strategy, risk management, asset allocation, governance and stewardship activities. Financial regulators around the world are to a greater extent focusing on financial institutions' capabilities, preparation and actions to manage climate change and other material sustainability risks.
On 5 June 2019, the first annual general meeting (AGM) of DWS Group GmbH & Co KGaA took place and our Chief Executive Officer has announced “to make sustainability a core component of its fiduciary action”. This has further amplified our role as fiduciaries for our clients and our obligation to help them keep and build their wealth. This continues to apply even more to include non-financial, environmental, social and corporate governance factors to the best possible extent. We do this to further strengthen ESG integration efforts in every part of our investment process. Putting ESG at the core of our fiduciary actions goes beyond our own investment decisions but also by intensifying active ownership of our holdings, extending proxy voting and number of engagement activities to drive change for the benefit of our clients.
DWS is convinced that putting ESG at the core of our fiduciary actions implies embedding ESG in the investment process more firmly. It is important to us that in addition to aligning our clients’ investments with their personal values, striving to improve risk-adjusted returns or diversifying their portfolios, we can also help them to achieve a positive environmental or social contribution. Our Responsible Investing Statement guides our approach to ESG topics. Financially material ESG topics and global trends are integrated into our investment processes in all asset classes across our Active, Passive, and Alternatives investment decisions and we support the growth of dedicated ESG products and solutions. In our view, integrating environmental, social, and corporate governance factors into the investment process contributes to a better understanding of businesses and the environments issuers operate in. It enables us to identify the risks and opportunities that a traditional financial analysis would miss, or fail to systematically address, with potentially significant impact on long-term investment performance.
Norm Compliance and Human Rights Assessment
In response to DWS’s 2018 Sustainability Report, we felt the need to become more proactive regarding due diligence on human rights. This is why we introduced an additional procedure for the identification of actual and potential adverse impacts on human rights. The goal of introducing DWS’s methodology overhaul related to norm behaviour was to give a more balanced picture on norm violations and to reduce the reliance on UNGC only. We will continue to put a high emphasis on issuers’ norm compliance with a particular focus on environmental topics, climate change and human rights. Additional detail on our new approach for norm compliance can be found in our Sustainability Report 2019.
Smart Integration of ESG into our investment process
Current regulation already asks investment managers to integrate material non-financial information into their investment decisions – alongside financial analysis - as part of their role as fiduciaries. DWS aims to identify and manage risks stemming from environmental, social or corporate governance (ESG) factors more effectively and explicitly. On 4 December 2019, the Executive Board approved a proposal for an advanced investment process of “Smart Integration of ESG”. This was also communicated at the DWS Investor Day on 10 December 2019. DWS has deliberately decided against an approach of implementing top-down sector-based exclusions. In doing so, DWS will introduce an overarching process of enhanced level due diligence, when there is evidence that issuers face excessive climate transition risk or severe and confirmed violations of international norms. The process will be modular in order to take timely controversies into account. The overarching process will be rolled out in a two-step approach where in the first step the due diligence is managed by a Council for Responsible Investments and is embedded as research into research and portfolio construction process. In a second step, the decisions of the new Committee (as opposed to a council) for responsible investments become binding as soon as the sales documentation and investment guidelines of the portfolio reflects this new approach. Hence the Council will become a Committee with decision-making authority. This due diligence process can in the future lead to a potential exclusion from the investment universe. Exclusion should only be applied as a last resort since we generally believe more in driving change and assuming stewardship responsibilities through engagement rather than using exclusions. Issuers, which receive a waiver for ongoing investment during the process should be engaged with on a mandatory basis. Additional detail on this approach is outlined in our Sustainability Report 2019.
Within Alternatives our real estate investments continue to position ESG as integral to investment strategies. At the core of the approach is our goal to preserve and enhance risk-adjusted returns and to reduce environmental risk, improve asset efficiency, and deliver high-quality spaces to tenants. ESG considerations are incorporated into the investment framework of the Infrastructure business at all stages of the investment lifecycle, from the initial screening and due diligence to the asset management and exit stages. Sustainable Investments (SI) operates investment initiatives within the Alternatives division that combines positive and stable financial returns with measurable economic, social and/or environmental outcomes (“triple bottom line”).
ESG and Sustainable Investments
By the end of 2019, we reported € 69.7 billion of dedicated ESG and sustainable AuM, € 16.5 billion of real estate investments in certified green-labelled buildings and € 862 million infrastructure investments in renewable assets. We managed assets with a total volume of € 767.4 billion (as of Dec. 31, 2019). In order to account for the structure of our asset base, we defined AuM as a) assets held on behalf of clients for investment purposes and / or b) client assets that are managed by us on a discretionary or advisory basis. Within Alternative investments, this can either be fee-earning committed or fee-earning invested capital.
We generally follow industry standards and guidelines in classifying ESG AuM. In 2019, DWS has decided to provide additional transparency in its sustainable assets under management base by introducing additional categories as outlined in our Sustainability Report 2019.
Development of products for our clients
Our financial performance depends particularly on the ability to develop, market and successfully manage new attractive investment products and services. The development and introduction of new products and services requires continued innovation on our part and may require significant time and resources as well as ongoing support and investment. If our products are unsuitable or inappropriate for our clients or the target market, we could face potential liability towards them.
Our products and investment solutions are designed to meet current and future client needs. We seek to ensure that the product is designed in such a way that its product features (return expectations, liquidity, diversification or hedging benefits) provide value to our clients. We seek to produce transparent, accessible products that are beneficial to the individual without being detrimental to the world at large.
ESG data is the cornerstone of our ESG analysis. Our ESG Engine allows automated and bespoke screenings for all kind of clients. The information provided by the ESG Engine is available to all of our portfolio managers and analysts, allowing them to access qualitative sustainability parameters alongside traditional financial data. This means that they can easily integrate the information into their detailed analysis and embed it into the management of active and passive mandates for all liquid asset classes. The data and the results of our analysis are available for all mutual funds for private investors, as well as for individual products and strategies for institutional clients. Dedicated ESG funds should help clients to find appropriate investment solutions which are in line with regulatory requirements derived e.g. by the EU taxonomy or local authorities.