But has the rapid increase in funds that prioritize environmental, social and governance – or “ESG” – issues actually helped achieve these goals? Or is it mostly a sleight of hand as banks and investment managers repackage old products and affix a “green” label to make them look more desirable?

A crackdown by regulators is forcing the investment community to wrestle with these questions, generating uncertainty about the future of Wall Street’s ESG fervor.

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.

“The actions taken by the prosecution are directed against unknown individuals in connection with greenwashing allegations against DWS,” Deutsche Bank said in a statement. “In response, DWS said it has cooperated continuously and fully with all relevant regulators and authorities in the past and will continue to do so in the future.”

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.”

His criticisms came after You’re here (TSLA) was dropped from the S&P 500’s leading ESG index. The S&P Dow Jones Indices said the electric car maker’s ESG stance had been hurt by allegations of racial discrimination and poor working conditions at its factory in Fremont manufacturing.
Musk is not considered an ESG expert and has plenty of criticism. But the inclusion of ExxonMobil (XOM) in major S&P index holdings raised eyebrows.

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

US Treasury Secretary Janet Yellen admitted on Tuesday that she had not forecast how long high inflation would affect US consumers as the Biden administration tries to defuse growing political risk.
“I think I was wrong then about the path inflation would take,” Yellen told CNN’s Wolf Blitzer when asked about the 2021 comments that inflation posed only a “small risk.”

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.

Remember: After gobbling up government bonds and mortgage-backed securities during the Great Recession, the Fed began shrinking its balance sheet—which then held a relatively paltry $4.5 trillion in assets—at the end of 2017. halted the process in 2019 as markets slumped.

“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.

Next

Soft (CHWY) and GameStop (EMG) release results after US markets close.

Also today :

  • May’s ISM manufacturing index arrives at 10 a.m. ET.
  • The latest U.S. job posting data is also released at 10 a.m. ET.

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