Is it always what it says or is sustainability communication exaggerated, perhaps even a lie? Not only after the recent problem that Deutsche Bank’s fund subsidiary DWS had to endure with its fired head of sustainability Desiree Fixler, investors who want to invest in sustainable investments are asking themselves whether the products are really as “green” as they like to be touted. And how meaningful are ESG ratings? Anyone who “exaggerates their efforts in implementing sustainable investment strategies for advertising purposes”, as the NZZ politely puts it, is greenwashing, in other words verbally washing their products greener than they are.

 

Lax testing practices?

Fixler, who was hired by DWS to build Deutsche Bank’s fund subsidiary into a global leader in sustainable investment products, had publicly criticized DWS for being too lax when it came to screening companies to be included in DWS sustainability funds for ESG aspects. ESG is understood to mean the consideration of criteria from the areas of:

  • Environment: Environmental and climate protection, use of renewable energies, reduction of emissions, careful use of raw materials and energy,
  • Social: Occupational safety, health protection, fair working conditions, prohibition of child and forced labour, compliance with ESG rules by suppliers, as well as
  • good governance: ethical management, prevention of corruption, compliance, independent board of directors, risk management.

DWS also relies too much on the ratings of agencies – as is common practice in the industry (even after the subprime disaster) – without verifying the results through its own sustainability analyses. In addition, the sustainability assessment methodology according to the ESG criteria is anything but uniform.

DWS and its parent, Deutsche Bank, vehemently deny Fixler’s allegations of negligence. All well and good. But then what was Wirecard stock doing in DWS sustainability funds long after the first revelations about the now insolvent payment processor and financial services provider became known? Nonetheless, the authorities have taken notice. The U.S. Department of Justice, the U.S. Securities and Exchange Commission and Germany’s Bafin are investigating DWS on suspicion of greenwashing, according to the Wall Street Journal and Reuters news agency. An isolated case or an industry problem?

Advertising exaggerates. That’s all right. Up to a certain limit. Lies and false promises to lure customers with sustainable products are not tolerable and can have (criminal) legal consequences for the originators, as the scandal surrounding the manipulated exhaust emissions of diesel vehicles from the VW Group impressively showed. Until now, VW has been regarded by many analysts and rating agencies as exemplary in terms of its environmental commitment. The only thing is that no one seems to have checked it out in detail.

 

 

 

A widespread problem

But the problem of greenwashing is widespread: If only because of the unclear terminology, there are still investment products on the market that promise more climate impact than they actually offer, the NZZ quotes Zeno Staub, Vice President of the Association of Swiss Asset Management and Wealth Management BanksVAV and CEO of Bank Vontobel. Regulators are becoming increasingly aware of such “false promises”.

Of course, it is not possible without clear international standards, emphasise Staub and Philipp Rickenbacher, VAV president and head of Bank Julius Bär, but warn against excessive “legalisation”. This would stifle innovation in ESG investments.

Unfortunately, ESG reporting is anything but uniform. In particular, there are regional differences or different weightings. In the USA, for example, the social component (no discrimination on the basis of race or gender) is given greater weight in investments that are to receive the ESG label than in Europe, where the environmental aspect (climate protection) is given priority. In Asia, on the other hand, the fight against poverty is often at the forefront of ESG assessment: investments in new technologies that simultaneously destroy jobs on a large scale in traditional production facilities then no longer appear necessarily sustainable from this social perspective.

“If the US were to make an example of DWS in terms of greenwashing, other financial institutions would also have to re-evaluate their own sustainability promises,” argues the NZZ. After all, there is a lot at stake. The financial information service provider Morningstar, which has access to data on around 500,000 shares, investment funds and other securities, puts the volume of sustainably invested funds worldwide at USD 2.2 trillion as of the end of June 2021.

 

 

 

Sustainable Finance as a success factor

Not only the big banks are in demand and are criticised for their handling of sustainability. VAV, which according to its own information manages 23 institutions with assets under management of CHF 1,213 billion, also wants to become more sustainable and polish up its “sustainable finance” image.

Sustainable finance is becoming an increasingly important success factor – both for the financial centre as a whole and for its players. “We Swiss asset management banks can, must and will make a contribution (…), because climate risks also mean investment risks,” VAV quotes its President Philipp Rickenbacher.

The VAV has defined 16 priorities to be pursued (on a voluntary basis), regularly reviewed and further developed. Recognised international standards are to be implemented for transparent disclosure. Specifically, these are the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) of the Financial Stability Board (FSB), the Principles for Sustainable Investment (PRI) and the Principles for Responsible Banking (PRB) of the UNO, as well as “as far as possible”, the application of the EU taxonomy. In addition, VAV members conduct climate-related stress tests.

 

 

 

Uniform rules are lacking

The crux of the matter is that there are no uniform regulations and the language used is inconsistent. In accounting, standards have emerged over the past decades that are understood and accepted by all parties involved and can be verified accordingly. ESG reporting has not yet reached this stage.

The Basel-based FSB was established in 2009 and is a high-level body composed of representatives of finance ministries, central banks, the supervisory authorities of the G20 countries, the EU Commission, the International Monetary Fund (IMF), the World Bank, the Bank for International Settlements (BIS) and the European Central Bank (ECB). The FSB also includes organisations that set international standards, such as the Basel Committee on Banking Supervision (BCBS), the International Association of Insurance Supervisors (IAIS) and the International Organization of Securities Commissions (IOSCO). The FSB discusses issues of fundamental systemic importance for global financial stability.

The FSB monitors the international financial system for potential weaknesses and identifies any need for action. In addition, the committee coordinates and promotes the exchange of information between the various authorities. In addition, it is to play a stronger role in cross-border crisis management.

 

 

 

The difficulty of control

You can claim a lot, especially companies that are accused of greenwashing. Since 2017, listed companies in Europe have been obliged to submit regular sustainability reports. Newly created ESG rating agencies evaluate information on corporate governance, environmental protection and social issues of a group or a company and compile corresponding rating reports, which investors, banks or investment companies can then use as a guide.

For better national and global comparability and evaluation, ESG scores were also introduced to show which of the listed companies pays the most attention to and implements ESG criteria. Regular rankings are thus created in accordance with the “best-in-class” approach. The German Sustainability Code (DNK) has been in existence since 2011 and was introduced as a cross-industry transparency standard for reporting corporate sustainability performance. It provides a framework for reporting non-financial performance that can also be used internationally by organisations and companies of all sizes and legal forms. The Sustainability Code lists companies that comply with sustainability standards and also publish them. The Sustainability Code was developed by the German Council for Sustainable Development (RNE), Berlin, which advises the German government on sustainability policy. It claims to be independent in its activities and has been appointed by the Federal Government every three years since 2001. Its members include 15 public figures from business, science and politics.

The importance of sustainability rating agencies such as MSCI, Sustainalytics, Morningstar, ISS ESG and Ecovadis is gradually growing in the financial sector. However, in an online survey conducted by F.A.Z. Business Media | research among 170 German financial decision-makers at the end of 2020, more than a quarter of the respondents were not (yet) aware of a single ESG rating agency. 46% of the financial decision-makers surveyed from companies with sales of EUR 1 bn or more said that their own company had an ESG rating. For companies with sales of EUR 5 bn or more, the figure was 71%.

 

 

 

Binding benchmarks for Switzerland

On 18 August 2021, the Federal Council adopted key parameters for future mandatory climate reporting by large Swiss companies. Sustainable Finance offers the Swiss financial centre the opportunity to further strengthen its competitiveness, according to the Federal Council’s press release. Under the leadership of the Federal Department of Finance (FDF), a binding consultation draft on the implementation of the recommendations of the FSB Task Force on Climate-related Financial Disclosures (TCFD) for Swiss companies is to be drawn up by summer 2022.

The Federal Council has set the following benchmarks: Public companies, banks and insurance companies with 500 or more employees, more than CHF 20 million in total assets or more than CHF 40 million in turnover are obliged to report publicly on climate issues.

Public reporting includes, on the one hand, the financial risk that a company incurs through climate-relevant activities. On the other hand, the impact of the company’s business activities on the climate and the environment must be disclosed. This “double materiality” also corresponds to the EU’s approach.

Minimum requirements are intended to ensure “that disclosures are meaningful, comparable and, where possible, forward-looking and scenario-based”, as the Federal Council emphasises. The mandatory implementation of the TCFD recommendations is expected to take place from 2024 for the 2023 financial year. The business associations and the environmental and consumer protection associations had “by a large majority welcomed” the benchmarks.


Manred Kröller
Financial journalist

 

 

This post has been translated automatically

 

 

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