Week 22: Party over for ESG greenwashing?

In this issue: ▸ DWS police raid a huge blow to ESG greenwashing ▸ What will happen now? ▸ You need ESG analysis, not just data ▸ 10 Commandments of ESG Investing ▸ A dire climate warning

Bang. A heavy blow to the skull echoed across the ESG world last week, hitting walls, floors, desks, chairs. Faces pale and stunned. Not many words uttered. Messages and emails going back and forth. “Have you seen it?”, “Is this for real?”, “Imagine if this could happen here.” And it can. Be sure about it.

Management meetings are held, lawyers and compliance officers are summoned, questions are asked despite the fact that most of the answers are already known. Yes, this can happen to so many other wannabe ESG managers around the world. Tomorrow.

Now millions of ESG brochures will be called back, texts on web pages with magnificent commitments will be reworded, sales people will have to edit sales presentations where ESG is fully and utterly integrated into the “core strategy of our asset management company”.

The music is changing and dancing to it will require a bit more sweat. 

What I’m talking about is of course the news that the CEO of Deutsche Bank’s DWS Group, Germany’s top asset management firm, has resigned hours after the company’s offices in Frankfurt were raided and evidence was seized by police investigating claims of greenwashing.

What happened to DWS is good for ESG, but it is even better for the zillion clients who have been promised so much and given so little. This will change, this has to change. ESG is big business and it is time that it takes itself seriously.

Sadly, the financial authorities lack the capacity and muscle to do more than two or three hits every year, but the message they send is clear. You can run but you cannot hide. The fear this installs in the ranks of asset managers around the world is significant.

The reckoning time is here, but it will take years before ESG is purged of the hypocrisy, lies, and deception. But ESG will come out on the other side. It has to.

What will happen now?

So, what will the impact of this be more specifically? What will happen now?

Now disclaimers will become much longer, and the compliance departments will need to be much more involved in what is told on ESG to clients – and what is not told. The big problem is, and will remain to be, that many compliance departments have little or very limited capacity to really assess if ESG is or is not integrated into the investment process. They simply lack in-depth knowledge, despite all the good will, to see through the fog of what they are told.

What we will see is also more article 6 products as the industry will run for safety and package ESG as something they do, but not really on an investment level, more like a nice to have add-on. Asset managers, and they are many, that have been using ESG as a marketing, sales, PR, communication “we have it all” thing, they will have a harder time now, and the threshold for them will significantly increase. You will see big fall-backs on products that claim ESG.

Meanwhile, those who have done ESG for real will have a harder time and will need to put much more effort into convincing clients what and how they are doing ESG.

Simply put, ESG will be harder to sell and demand much more. Complexity will increase due to the increase in regulation and the far more advanced scrutiny by authorities. Why? Because ESG is big, big business and it needs to be tamed. It is lightly regulated and left to various, often generous interpretations.

You need ESG analysis, not just data

What is also interesting with this historical event is the signal that ESG data is not the same thing as ESG analysis. If you claim integration and you only have ESG data from one of the big providers without a proprietary ESG analysis model and without having the required resources you are in big trouble. ESG data that is not verified, but self-reported by do-gooder companies is crap. Analysis eats data for breakfast, always. Results matter. Always.

If you sell ESG products that are process, not result oriented, and if you lack the capacity to show how it is done, tracked and measured and what results you achieve, well, maybe now is the time for you to throw in the towel. 

The ranks of big financial players claiming ESG fame are full of well-paid and well-educated people who opt for deception and ignorance to science. From DWS to HSBC to BlackRock, it was a break in the internal ranks that caught the attention of FSA and thus created significant waves for these “leading ESG brands”.

With time the whistleblowing will increase, mutiny is not a mutiny if there was never really a ship you were serving on... 

Imagine if more people start walking and talking, just like Desiree Fixler did to the various FSA offices. Going in for a coffee and cake. The courage and sense of genuine responsibility that these people, after all, possess is becoming more important than the next managerial job.

I wonder what the climate parties with mirror balls and smoke on the dance floor will look like when FSAs and SEC start looking at the net-zero commitments. You can almost see it ending, lights being turned on, and that physical feeling everyone knows, that the party is over. 

10 Commandments of ESG Investing

In light of the DWS story and the widespread ESG greenwashing amongst asset managers, I would like to re-share my “10 Commandments of ESG Investing”, originally published in March 2021. You can read the full piece here.

1. Above all else, it is about people and planet.

2. You must allocate significant resources.

3. You must be patient.

4. It will be painful.

5. You must be consistent.

6. You will be forgiven.

7. You must remember S and G.

8. You must go beyond data.

9. You must understand the limits.

10. You must always focus on outcome.

A dire climate warning

Finally, an interesting and important piece that was ignored last week is the warning from Katharine Hayhoe, chief scientist for the Nature Conservancy in the US and professor at Texas Tech University, who said that the world is heading for dangers unseen in the 10,000 years of human civilisation – and added that efforts to make the world more resilient were needed but by themselves could not soften the impact enough.

In other words, a leading climate scientist has just reminded us that we are in big trouble and that we cannot adapt our way out of the climate crisis. Because adaptation is too expensive and unfeasible compared to urgently cutting greenhouse gases.

“If we continue with business-as-usual greenhouse gas emissions, there is no adaptation that is possible. You just can’t,” she said in the interview with the Guardian.

These impacts would be felt across the world, she warned. “Our infrastructure, worth trillions of dollars, built over decades, was built for a planet that no longer exists,” she said. Changing that infrastructure would cost further trillions, so allowing greenhouse gas emissions to continue to grow would mean ever-rising impacts and costs.

The whole of modern life is at stake, she added. “Human civilisation is based on the assumption of a stable climate,” she said. “But we are moving far beyond the stable range.”

That’s all for now. Have a great week.

Kind regards, Sasja