Time To Take The ‘E’ Out Of ESG Investing

The days when selling ESG funds was an easy marketing ploy for fund managers are over.

Investing based on environmental, social and governance criteria has been a hugely popular new market for full-service asset managers struggling to compete with low-fee tracker funds. While this type of ethical investing can genuinely mean different things to different people, scrutiny of the environmental part of the claims is rising.

On Wednesday, Asoka Woehrmann, chief executive of DWS, Deutsche Bank’s minority-listed asset-management subsidiary, said he would resign after its coming annual general meeting. The news came the day after German authorities raided the offices of both companies amid allegations that DWS made misleading claims about ESG funds. The U.S. Securities and Exchange Commission and federal prosecutors also have ongoing probes.

ESG investing has been a boon for the industry. Fund managers have often promised investors higher returns while doing good with their money. However, ESG is a slippery concept, without widely accepted definitions, criteria and metrics. Infamously, a single company’s ESG rating can vary widely between credible credit-rating firms.

That variance isn’t unreasonable. There are many ways to combine the three criteria into one score, and for any single one there can be honest disagreement about what good or bad actually looks like. For example, some might rank Shell highly on “E” because it has a plan to decarbonize its business, or poorly because it sells oil and plans to sell natural gas for years.

However, the scope for variance in environmental ratings is starting to narrow. European officials have set new rules for different categories of sustainable investments and are working on definitions of what is and isn’t green. The SEC is also working on its own set of rules. While the standards increase the compliance burden on fund managers, they should also help ensure investors are getting what they were promised, rather than just a lot of hot air.

Concerns about greenwashing—in which reality falls short of green claims—are widespread and recent events are only fanning the flames. The SEC recently fined Bank of New York Mellon $1.5 million for misleading claims about ESG funds. DWS reported far lower “ESG assets” in its most recent annual report than “ESG integrated” assets in the prior year. A whistleblower alleged last year that its disclosure was misleading. It will now be up to a new boss to draw a thicker line under the affair.

A speech last month entitled “Why investors need not worry about climate risk” from the head of responsible investment at HSBC’s Asset Management arm, in which he argued that the financial effects of climate change would be “de minimis,” only reinforced concerns that inside thinking often doesn’t match the marketing. The bank’s executives were quick to distance themselves from the now-suspended employee’s comments.

The continuing fallout at DWS is a warning to other asset managers to stand up or scale back green claims. More broadly, the tighter rules around what qualifies as environmentally friendly, even as social and governance criteria remain less well-defined, could mean it is time to take the “E” out of ESG investing—if not retire the grouping altogether. It never helped investors, and now it isn’t much use for fund managers either.

Wedding planner Sterling Boulet has some advice for brides-to-be regarding lab-grown diamonds, which cost a fraction of the natural ones.

“If you’re trying to get your man to propose, they’ll propose faster if you offer this as an option,” says Boulet, of Raleigh, N.C. Recently, she adds, a friend’s fiancé “thanked me the next three times I saw him” for telling him about the cheaper lab-made option.

Man-made diamonds are catching on, despite some lingering stigma. This year was the first time that sales of lab-made and natural mined loose diamonds, primarily used as center stones in engagement rings, were split evenly, according to data from Tenoris, a jewellery and diamond trend-analytics company.

The rise of lab-made stones, however, is bringing up quirks alongside the perks. Now that blingier engagement rings—above two or three carats—are more affordable, more people are dealing with the peculiarities of wearing rather large rocks.

An engagement ring made with a lab-grown diamond at Ada Diamonds in New York City. PHOTO: CAM POLLACK/THE WALL STREET JOURNAL

Esther Hare, a 5-foot-11-inch former triathlete, sought out a 4.5-carat lab-made oval-shaped diamond to fit her larger hands as a part of her vow renewal in Hawaii last year. It was a far cry from the half-carat ring her husband proposed with more than 25 years ago and the 1.5-carat upgrade they purchased 10 years ago. Hare, 50, who lives in San Jose, Calif., and works in high tech, chose a $40,000 lab-made diamond because “it’s nuts” to have to spend $100,000 on a natural stone. “It had to be big—that was my vision,” she says.

But the size of the ring has made it less practical at times. She doesn’t wear it for athletic training and swaps in her wedding band instead. And she is careful to leave it at home when traveling. “A lot of times I won’t take it on vacation because it’s just a monster,” she says.

The average retail price for a one-carat lab-made loose diamond decreased to $1,426 this year from $3,039 in 2020, according to the Tenoris data. Similar-sized loose natural diamonds cost $5,426 this year, compared with $4,943 in 2020.

Lab-made diamonds have essentially the same chemical makeup as natural ones, and look the same, unless viewed through sophisticated equipment that gauges the characteristics of emitted light.

At Ritani, an online jewellery retailer, lab-made diamond sales make up about 70% of the diamonds sold, up from roughly 30% two years ago, says Juliet Gomes, head of customer service at the company, based in White Plains, N.Y.

Ritani sometimes records videos of the lab-diamonds pinging when exposed to a “diamond tester,” a tool that judges authenticity, to show customers that the man-made rocks behave the same as natural ones. “We definitely have some deep conversations with them,” Gomes says.

Not all gem dealers are rolling with these stones.

Philadelphia jeweller Steven Singer only stocks the natural stuff in his store and is planning a February campaign to give about 1,000 one-carat lab-made diamonds away free to prove they are “worthless.” Anyone can sign up online and get one in the mail; even shipping is free. “I’m not selling Frankensteins that were built in a lab,” Singer says.

Some brides are turned off by the larger bling now allowed by the lower prices.When her now-husband proposed with a two-carat lab-grown engagement ring, Tiffany Buchert, 40, was excited about the prospect of marriage—but not about the size of the diamond, which she says struck her as “costume jewellery-ish.”

“I said yes in the moment, of course, I didn’t want it to be weird,” says the physician assistant from West Chester, Pa.

But within weeks, she says, she fessed up, telling her fiancé: “I think I hate this ring.”

The couple returned it and then bought a one-carat natural diamond for more than double the price.

Couples find that lab-grown diamonds have made it more affordable to get engaged. PHOTO: CAM POLLACK/THE WALL STREET JOURNAL

When Boulet, the wedding planner in Raleigh, got engaged herself, she was over the moon when her fiancé proposed with a 2.3 carat lab-made diamond ring. “It’s very shiny, we were almost worried it was too shiny and was going to look fake,” she says.

It doesn’t, which presents another issue—looking like someone who really shelled out for jewellery. Boulet will occasionally volunteer that her diamond ring came from a lab.

“I don’t want people to think I’m putting on airs, or trying to be flashier than I am,” she says.

For Daniel Teoh, a 36-year-old software engineer outside of Detroit, buying a cheaper lab-made diamond for his fiancée meant extra room in his $30,000 ring budget.

Instead of a bigger ring, he got her something they could both enjoy. During a walk while on an annual ski trip to South Lake Tahoe, Calif., Teoh popped the question and handed his now-wife a handmade wooden box that included a 2.5-carat lab-made diamond ring—and a car key.

She put on the ring, celebrated with both of their sisters and a friend, who was the unofficial photographer of the happy event, and then they drove back to the house. There, she saw a 1965 Mustang GT coupe in Wimbledon white with red stripes and a bow on top.

Looking back, Teoh says, it was still the diamond that made the big first impression.

“It wasn’t until like 15 minutes later she was like ‘so, what’s with this key?’” he adds.

Time To Take The ‘E’ Out Of ESG Investing

The decision by the boss of DWS to step down is a wake-up call to the investment industry as environmental claims come under growing scrutiny.

Couples find that lab-grown diamonds make it cheaper to get engaged or upgrade to a bigger ring. But there are rocky moments.