Managing assets for clients

Investors, clients and other stakeholders are requesting more transparency around corporate activities and are making decisions based on a broader variety of information. In the age of digitalization information is widely available and at comparatively low cost.

The resulting improved awareness, traceability of entire value chains and overall transparency are allowing investors to identify additional opportunities and risks from corporate behaviors related to the environment, society and governance (ESG). These investors are almost always active as well, either in a corporate or personal capacity. They are challenging asset and wealth managers, looking for appropriate short and long term investment strategies in response to these opportunities and risks.

Investors’ increasing interest in responsible investment strategies – which make ESG issues an integral part of the investment decision – makes this a fast growing segment. Growth of the market is driven mainly by institutional investors switching to this investment style, while retail investors are catching up fast.

At the end of 2014, we managed and advised on € 5.4 billion assets incorporating ESG criteria and themes (2013: € 5.1 billion), which represents about 0.5 % of total assets under management. We made further progress in 2014 in strengthening the ESG governance and management approach in our asset and wealth management business.

Achieving long-term performance

Corporate behaviors that externalize costs to society – for example, to taxpayers across the world and to future generations – are likely to have detrimental long term effects on profitability. Conversely, companies or projects that meet or exceed internationally accepted ESG standards may represent better investment opportunities on a longer term investment horizon.

For that reason, we deem it part of our fiduciary duty to incorporate all identifiable opportunities and risks to a business in our investment and risk management process. This is a precondition for achieving the best possible long-term performance for our clients.

Our ESG approach already ranges from actively managed “best-in-class” portfolios and algorithmic or “passive” ESG investment solutions, to impact investments in projects that directly create employment, reduce greenhouse gas emissions or improve food security in Africa.

We are guided by the UN Principles for Responsible Investment (PRI), which we signed in 2008. In 2014, we submitted our second PRI report and have been active in working groups. Engagement and proxy voting are key pillars of our ESG investment philosophy and key components of our fiduciary duty regarding corporate governance.

Providing state-of-the-art ESG solutions

We established the ESG Head Office in 2013 as a central function serving the entire Deutsche Asset & Wealth Management (Deutsche AWM) division, including all portfolio managers. The office reports directly to the Chief Investment Officer. It is responsible for providing state-of-the-art ESG solutions to further improve our investment and risk management process, based on objective and leading ESG research.

The role of the ESG Head Office in the New Product Approval process emphasizes the importance of ESG integration throughout the whole Deutsche AWM platform. The office will analyze all products that require an NPA for ESG compliance, paying particularly close attention to products classified as ESG.

The ESG Head Office also offers the development of ESG products for broader investor audiences as well as tailored solutions for the specific ESG standards and requirements of single investors. The greatest challenge continues to be defining and setting common ESG standards that can be objectively reviewed for compliance. We are meeting that challenge by integrating data from external ESG agencies into our investment process. This allows a blend of objective and reliable external intelligence with solid in-house ESG expertise.

We use externally accepted standards such as

• the UN Global Compact
• the UN Principles for Responsible Investments (UN PRI)
• the UN Convention against Corruption
• the Geneva Additional Protocol II
• the International Labor Organization Convention (ILO)
• the Convention on Cluster Munitions
• the Ottawa Protocol on Anti-Personnel Mines

to check compliance with norms and adopt a clear separation of duties between data collection and assessment. The externally sourced intelligence is translated into individual parameters which are used, for example, to define exclusions. The choice of parameters is subjective, but the application of the criteria is objectively based on international standards.

Strengthening our research with a new ESG engine

Fulfilling our commitment to ESG integration, we have established best practice in our proprietary research framework, collaborating with relevant bodies such as PRI to develop this important area.

Since 2007, our ESG rating process has translated raw data from the ESG research provider Sustainalytics into an A – F rating. Sustainalytics provides us with approximately 200 ESG indicators for each of around 1,800 stocks in the ESG global research universe.

In 2014, we developed a proprietary software solution that:

• Uses several additional data providers, each with unique strengths
• Allows for standardized fully flexible negative screening that can be customized to mirror each client’s individual ethical framework
• Allows constant analysis and monitoring of corporate ESG behaviors
• Creates an investment overlay that easily blends active and passive strategies.

The so-called ESG engine is based on data from five leading external ESG data providers. They provide a variety of services, maximizing the expertise we source to provide optimum objectivity and reliability. We can screen for up to 1,500 distinct subsets of corporate ESG behaviors for more than 5,000 companies. This means we can develop ESG products tailored to the specific ESG standards of individual institutional investors.

External data providers

Sample ESG classes we currently test for

The ESG engine automatically assesses and ranks a corporation on several ESG classes and allows exclusions of companies with controversial involvement in relevant classes. The test can be tailored so it is up to the client to specify the issues we scan for, what defines a severe issue and how much evidence on the issue is required.

The tool creates an ESG rank on four levels in relation to controversial products or severe breaches of norms:

• Controversies – significant involvement
• Warnings – secondary involvement
• Unknown
• Confirmed no involvement

Exercizing responsible ownership

The ESG engine informs investment decisions, but we also subscribe to the PRI principle of continued engagement with investee companies.

We promote better corporate governance and responsible practices through dialog with companies and proxy voting. Our aim is to shape corporate strategy as well as monitor management performance. We expect companies to manage relationships with shareholders and stakeholders effectively, and to integrate environmental and social aspects into strategic planning and operations.

An active dialog provides a deeper understanding of companies and enables us to improve the investment process, which leads to better and sustainable long-term returns for our clients. Our engagement activities promote responsible business practices and address business risks associated with breaches of environmental and social regulations or internationally accepted norms. If a constructive dialog with company management is not successful, we will vote accordingly and may voice criticisms publicly.

We exercise voting rights according to a uniform and transparent process, and publish votes cast on our website. Voting decisions are defined by the legal framework, national and international best practice as well as widely accepted environmental and social standards. Our governance standards are geared to the guidelines of the International Corporate Governance Network.

Innovating to create new products

We launched the first product using the new ESG engine in 2014. CROCI World ESG is a passive global equity fund created by applying an ESG filter to the established Deutsche Bank CROCI strategy.

CROCI World ESG invests in companies that do not have a material negative environmental, social or governance impact. It excludes companies with severe violations of norms as well as those with significant involvement in controversial activities. ESG filtering excluded 10 – 20 % of potential companies compared to the CROCI World, while both products have performed similar in 2014.

The following screening categories are applied to the CROCI World ESG:

• Controversial Conventional Weapons
• Nuclear Weapons and Defense
• Tobacco and Alcohol
• Gambling & Adult Entertainment
• Human & Labor rights Violations
• Forced & Child Labor
• Environmental Damage
• Corruption and Business Ethics
• High reputational risk