From Elon Musk to the Fed, ‘sustainable’ investments are under fire

What’s going on: German prosecutors raided asset manager DWS and the headquarters of Deutsche Bank, its majority owner, on Tuesday over “green money laundering” allegations. DWS is facing investigations on both sides of the Atlantic after a whistleblower claimed he overstated his green credentials and misled investors.

Asoka Woehrmann, CEO of DWS, announced his resignation on Wednesday.

The raid came just a week after the U.S. Securities and Exchange Commission charged BNY Mellon’s investment management division with “misrepresentations and omissions” regarding its ESG processes.

The SEC claimed that between July 2018 and September 2021, BNY Mellon “represented or implied in various statements ‘that certain investments’ had undergone an ESG quality review, although this did not not always been the case”.

BNY Mellon agreed to pay a $1.5 million fine but did not admit or deny the findings, according to the agency.

It’s not just the suits that are hitting the ESG hard. Tesla CEO Elon Musk recently tweeted that ESG “is a scam” that “has been weaponized by fake social justice warriors.”

Looking ahead: Investment managers argue that the philosophy behind ESG investing is not going away, especially given the urgency of the climate crisis.

“We are entering a world of climate transition and we need to get our clients’ capital on the right side, in the right way,” a senior asset management executive at a major Wall Street bank told me in the World. Economic Forum in Switzerland last week.

Still, the executive acknowledged that there could be better standards to ensure consistency across the industry, and that the current classification of ESG products is often unnecessary.

“It’s up to managers to do their own job in this space,” they said.

Janet Yellen admits she was ‘wrong’ about inflation

Since then, prices have continued to rise for a variety of reasons, including ongoing supply chain issues, the Omicron variant of the coronavirus, and Russia’s invasion of Ukraine.

“There have been unforeseen and significant shocks to the economy which have driven up energy and food prices and supply bottlenecks which have severely affected our economy which I did not fully understand back then, but we recognize that now,” Yellen said.

Take a step back: This admission was the latest indication that the administration’s expectations that the US economy would normalize have been upended. Yellen and other White House officials have previously called inflation a temporary side effect of the economy returning to normal after the pandemic.

Now it remains uncomfortably high, although there are signs it may have peaked. Economists are increasingly warning that a recession could be on the cards next year as the Federal Reserve hikes interest rates and high food and fuel prices threaten consumer spending.

What happens next: The Biden team has emphasized that fighting inflation is now primarily the job of the Fed.

“The Federal Reserve has the primary responsibility for controlling inflation,” President Joe Biden said in an op-ed in The Wall Street Journal on Monday.

Biden met Powell at the White House on Tuesday. He stressed that he would not interfere with central bank independence at a crucial time.

The big experiment that could shake the financial markets

On Wednesday, the Federal Reserve will begin a process it has never undertaken in its 109-year history: In an effort to fight inflation, it will begin shrinking the size of its balance sheet by $8.9 trillion.

Following the shock of the Covid-19 pandemic, the central bank printed money and bought an unprecedented volume of financial assets like government bonds to protect the economy and keep money circulating on the steps.

Now he is backtracking and starting to reduce his holdings. Along with interest rate hikes, it’s an important tool in the Fed’s toolbox to fight price hikes while trying to stave off a recession.

But it’s uncertain whether he will succeed, especially given the ambitious schedule he has planned. The last time the central bank went into sell mode, it caused significant turbulence in the markets.

“They’re coming through, absolutely,” a senior rates strategist at Bank of America said at the time.

This time around, the circumstances are even more complicated, given the continued impact of the pandemic and the war in Ukraine. In the meantime, nervous investors remain on the sidelines, unsure if the Fed can pull off the maneuver.

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Coming tomorrow: OPEC meets via video conference as the European oil embargo puts pressure on prices.