German law enforcement raided Deutsche Bank this week over allegations of “greenwashing,” the latest plot point in the growing shift toward corporate prioritization of environmental and social concerns.
Deutsche Bank announced Wednesday that Asoka Woehrmann, an executive who ran Deutsche Bank’s asset management firm DWS since 2018, would resign from his position following the raid. The investigation itself was launched after a former DWS manager alleged fraudulent advertising of sustainable investment funds.
Greenwashing is when corporations or investment firms obfuscate the truth about their environmental bona fides in order to reap the benefits of the environmental, social, and governance movement. For example, Starbucks courted criticism in 2018 when it was learned that its “strawless” lids, presented as cutting down on waste, led to the use of more plastic rather than less.
The ESG movement itself has been growing in strength in recent years as companies compete to show that they are not just beholden to profits but also broader environmental and social commitments.
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In the case of Deutsche Bank, investigators are probing accusations that DWS used the popularity of ESG financial products to attract investment under false auspices and that those financial products were not as environmentally friendly as they purported to be.
“The allegations are that DWS has been advertising so-called ESG financial products for sale as being particularly green and sustainable when they actually weren’t,” a spokesman for the public prosecutor told Fortune. “In the course of our investigations, we’ve found evidence that could support allegations of prospectus fraud.”
This isn’t the first instance of accused greenwashing. A few years back, Volkswagen, which had been touting its low-emission diesel vehicles, was caught in a massive scandal after it was uncovered that the company had been cheating on U.S. emissions tests, with the vehicles actually emitting far more greenhouse gas than the corporation touted.
“The problem has been … you’re finding people who are going to leverage the interest in ESG to promote it,” Brian Marks, executive director of the University of New Haven’s Entrepreneurship and Innovation Program, told the Washington Examiner. He said those ESG claims become greenwashing when the layers are peeled back and it is revealed that they were misrepresented.
The phenomenon has caught the attention of regulators across the world who are seeking to curb corporate and financial greenwashing.
Late last month, the Securities and Exchange Commission put forward two new proposals that aim to tighten the rules surrounding ESG investment funds.
One of the proposals would require advisers to provide more specific disclosures in fund prospectuses, annual reports, and adviser brochures based on how they pursue ESG strategies. For instance, funds that prioritize the environment would be mandated to disclose information about greenhouse gas emissions within their investment vehicles.
“ESG encompasses a wide variety of investments and strategies,” said SEC Chairman Gary Gensler at the time. “I think investors should be able to drill down to see what’s under the hood of these strategies. This gets to the heart of the SEC’s mission to protect investors, allowing them to allocate their capital efficiently and meet their needs.”
By putting these new guardrails in place, the SEC hopes to cut down on firms that greenwash investors.
Disclosures themselves have also been a target of the SEC.
Self-reporting of climate information has already become commonplace in business as investors increasingly embrace ESG standards, but the government now wants to mandate the practice.
Earlier this year, the government proposed a rule that would create guidelines for how and what companies must report to investors about how their business affects the climate. It says companies would be required to report direct and indirect greenhouse gas emissions and that those reports would be audited by an outside party.
The rule would lead to indirect pressure on the private sector to turn away from fossil fuels and reduce carbon emissions.
The ESG movement has also faced pushback, largely from conservatives and evangelists of traditional shareholder capitalism.
For example, in Texas, a state law prohibiting state entities from signing contracts worth more than $100,000 with companies that boycott fossil energy firms went into effect in September.
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In March, Texas Comptroller Glenn Hegar also requested that several companies provide lists of any mutual funds or exchange-traded funds in their portfolios that prohibit or limit investment in fossil fuels. Several companies responded to say that they don’t boycott investment in fossil fuels.
Despite the increasing popularity of ESG, rising energy prices and pressure from Republican officials such as Hegar are blunting some of the movement’s momentum.
