Our Approach to Sustainability
The United Nations Sustainable Development Goals (SDGs) set aspirations and targets for economic development, social inclusion and environmental sustainability and are applicable to both developed and emerging markets. Failing to achieve the SDGs could impact our wellbeing and create macro financial risks, which would impact the global economy as well as our business.
Our value chain consists of different stakeholders, including clients, investors, employees, shareholders and suppliers, as well as regulators, communities, media, and civil society, including non-governmental organisations (NGOs). All of our identified stakeholders have responsible points of contact within DWS Group.
While the interests of our stakeholders may be conflicting, we have to negotiate between these interests. We are open to constructive critique and dialogue, while showing this with sensitivity when conducting due diligence and improving our sustainability approach.
We consider a constructive engagement to be integral to understanding the expectations and concerns of our stakeholders. It not only helps us to comprehend the positive as well as negative impacts of our business activities more broadly, but also promotes acceptance for what we do, as we strive to strengthen trust and partnerships, and improve our sustainability performance.
ESG and Active Ownership
We act as a fiduciary for our clients and their interests come first. We are governed by our obligation to help them keep and build their wealth. Our goal is to deliver strategies to our clients that preserve and possibly increase their risk-adjusted returns. In our view, our fiduciary responsibilities include integrating non-financial, environmental, social and corporate governance factors to the best possible extent. This applies not only to our own investment decisions but also by assuming active ownership of our holdings, using proxy voting and engagement to drive change for the benefit of our clients.
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 issues such as climate risk into investment strategy, risk management, asset allocation, governance and stewardship activities. Financial regulators around the world are increasingly focusing on financial institutions' capabilities, preparation and actions to manage climate change and broader sustainability risks. In Europe, sustainable finance will be given added impetus thanks to the European Commission's Sustainable Finance Action Plan (SFAP). One of the aims of the EU SFAP is to divert capital towards sustainable activities to reach the EU's energy and climate goals by 2030. We will provide further details on our role in SFAP in section 6.5.1 “European Commission’s Sustainable Finance Action Plan”.
We believe that our expertise and extensive experience in sustainable investing provide us with valuable insights that assist us to further protect and grow our clients’ assets over the long term. The growing importance of ESG is evidenced by regulatory developments, independent research, as well as our own experience, which reveals that integrating ESG factors into the investment process has the potential to improve performance and reduce risk. Our ESG organisation, our ESG integration process undertaken over the last ten years as well as our continuous ESG training for investment professionals and improvement in our ESG database and its functionalities constitute a solid basis. These elements put DWS in a good position to offer bespoke ESG solutions to clients based on their own ESG criteria.
ESG and Sustainable Assets under Management
By the end of 2018, we reported € 32.8 billion of ESG and sustainable AuM, € 13.4 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 € 662 billion (as of Dec. 31, 2018). 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 follow industry standards and guidelines in classifying ESG AuM. Through regional organisations such as the European Sustainable Investment Forum (EuroSIF), the US Forum for Sustainable and Responsible Investment (USSIF) and UK Sustainable Investment and Finance Association (UKSIF), investor reporting to the Global Sustainable Investment Association (GSIA) has become a global standard for categorising ESG assets, and we follow its methodology. The EU framework is designed to help to ensure the integrity and trust of the sustainable finance market through new standards and labels for sustainable finance products such as green bonds. Known as the "sustainability taxonomy" in EU terminology, this unified classification system aims to help measure sustainable capital flows by codifying what can be classified as green investments.
While we are enhancing the level of ESG integration across our entire investment platform, the following table lists those assets that are managed under a dedicated ESG strategy. Based on data compiled by our Finance division, the Sustainability Office (reporting to the CIO for Responsible Investments) regularly compiles aggregated figures to the Executive Board. The Responsible Investment Leadership Team as well as our sales organisation regularly review the pipeline of new product initiatives.
Designing 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.
Product Lifecycle Management
We use regional Client- and Product Strategy fora, which have been established in 2018 on a regular basis to align strategies and campaigns across Coverage and the Investment Platform. When formulating a product strategy it is essential to proactively address global trends and to position a suitable product range where our clients can benefit from these global trends. These can be technology (digitisation, automation or robotics), environmental aspects (climate change, renewables or circular economy) or changing demographics (e.g. healthcare sector). The idea generation phase is step 1 of the product lifecycle management process.
Step 1 should ensure a proper matching of client needs, market developments and corporate strategy and enable a mutual development of the product plan and measurement how the plan is being executed. This approach is in principle adopted globally. In order to accommodate regional and legal particularities and differences in product structures, the process is regionally adapted with variations in responsibilities.
True partnership and beneficial cooperation between Product, Coverage and Product Platform to facilitate a strategic product planning and review process allows the business to further cultivate, maintain and improve consumer satisfaction, which subsequently strengthens the power of DWS in the market.
We illustrate the process in the following graphic, which demonstrates the lifecycle in a cross-functional interaction across our various teams.
Once the product / strategy idea has been generated and prioritised, the product design will be specified and checked for its feasibility (step 2). In step 3, the Product Platform team is responsible for the product governance process across the product life cycle and has set up a Product Governance Colloquium (PGC) to provide the respective DWS entity management boards and committees with an educated analysis for the approval or rejection of product initiatives. By doing so the process ensures that DWS delivering the right product to the clients so that the product features best fit of the clients’ needs. For Alternatives, the Product Development Committee assumes this role in various stages. Once the investment idea has been approved and the decision to start the design of a product made, the product will be launched which is part of process step 4.
The PGC conducts analysis, screening and due diligence of product-related initiatives. This includes the introduction, assessment and optimisation of any product launches, material product changes, product mergers and liquidations. Decisions taken in the PGC aim to consider all implications for DWS along the value chain, and in EMEA/APAC include legal and regulatory requirements. Head of Product Platform for EMEA and APAC reports to the Executive Board and chairs the PGC. This Colloquium includes the Business Control Officer and representation from Investment, Coverage, Legal, Compliance, Risk, and Operations. In the US, the PGC is chaired by the Global Co-Head of Product Strategy, who reports to the Regional Head of the Americas (an Executive Board member). Legal and regulatory requirements are assessed in conjunction with the separate Americas New Product Approval (NPA) Panel.
While this review and risk assessment process puts our clients’ and investors’ interests first it also includes an assessment of reputational risk. Reputational risk cannot be precluded, and is driven by unforeseeable changes in the perception of practices by various stakeholders such as the public, clients, shareholders and regulators. We strive to promote sustainable standards that will enhance profitability and minimise the risk that any association, action or inaction is perceived by stakeholders to be inappropriate or inconsistent with our values and beliefs. In order to comply with our fiduciary obligations, we have DWS-specific procedures in relation to reputational risk matters, as outlined in our respective Reputational Risk Procedures. These procedures are owned by our Non-Financial Risk Management team.
In step 5, Product Analytics supports senior management (e.g. Investment Platform, Coverage and legal entities / fund boards) by providing analytics / signals (e.g. performance issues, competitor trends, peer comparison, identification of loss making products) to enable better identification and facilitate reaction to client needs and behaviours. The ongoing task is to analyse products and performance and develop methods and processes to conduct efficient analytics for senior management. The team reports the outcomes of flow- and performance analysis to the Executive Board on a quarterly basis. The performance and “health checks” of our products is discussed monthly with portfolio management. The Investment Quality Management team does the analysis.
As a result of our Product Lifecycle Management approach, we have worked on various product initiatives in 2018. We have among other initiatives successfully launched and positioned thematic equity strategies and launched new products, which focus on AI, climate technology, green bonds or the UN’s SDGs. Our Passive team successfully positioned seven new ESG ETFs, while our Alternatives team worked on continuing the success of the Pan European Infrastructure Fund series by preparing to launch PEIF III in 2019.
New Product Approval and Systematic Product Review
A structured Product Governance process as well as the NPA and the Systematic Product Review (SPR) processes provide the basis for ensuring that we can confidently offer clients our products and services. We have created this framework to manage the risks associated with the implementation of new products and services, changes in product and services during their life cycles, and, the process by which they are systematically reviewed, to ensure they remain fit for purpose and consistent with the needs, characteristics and objectives of their intended market(s) throughout their lifespan. Applicable across all business areas and regions divisions, the respective processes cover different stages of the product life cycle review, with the NPA process focussing on pre-implementation and the SPR process on periodic reviews, post implementation.
A mandatory sign-off requirement in the context of new product approval (across the platform) is the due diligence on environmental, social or corporate governance risks. Our Sustainability Office provides this sign-off.
For 2018, the NPA process has approved 36 new initiatives for DWS across Active, Passive and Alternatives, covering seven jurisdictions. In the SPR process DWS reviewed 31 existing products.
Product Design and Demographic Change
We believe that our investment platform is well-positioned to address market trends. As outlined in section 4.4.1 “Product Lifecycle Management”, global industry trends are thoroughly analysed by the different regional Client- and Product Strategy fora. This provides our product functions with a profound knowledge of how to best position our product offerings.
As a result of demographic shifts over the recent years, ‘baby-boomers’ and ‘millennials’ form an increasingly important client group for us. With the baby boomer generation approaching retirement, we are seeing greater demand for sophisticated retirement solutions, which has triggered growth in outcome-oriented products such as multi asset. We aim to provide innovative solutions to address these retirement needs and old age provisioning, and we are also leveraging our expertise in customising pension products to develop the next generation of retirement solutions.
We have also been developing our digital solutions to meet the preferred investment demand of the millennial generation. As outlined in section 4.2 “Digitisation and Innovation”, we have enhanced our digital product offering and range of thematic funds to target new growth opportunities from this younger investor group.