The Group Sustainability Officer of a near EUR $1 trillion investment Fund, whistleblows to the financial regulators that the Fund is greenwashing its investments. The Fund learns of the whistleblower’s greenwashing allegations and investigates. The investigation finds no evidence to support the whistleblower’s allegations. The Fund takes no further action. The Fund sacks the whistleblower. Disgruntled, the whistleblower unsuccessfully pursues an unfair dismissal claim. Unsatisfied with the answers provided, the financial regulator with much fanfare raids the head offices of the Fund and its majority shareholder, a major Bank, and announces there is sufficient evidence to support an investigation into the whistleblower’s greenwashing allegations. The Fund’s CEO resigns following the raid. Later it is announced the now former CEO is being investigated for fraud and breach of governance policies. Other senior officeholders of the Bank announce their intention to resign. The Fund’s share price fluctuates. During all this, a consumer group sues and ultimately settles a greenwashing claim against the Fund.
The foregoing could be a movie plot. But it is in fact, a summary of the allegations surrounding the related investigations by BaFin (Germany’s financial regulator) and the US Securities and Exchange Commission (the SEC) into Deutsche Bank AG’s asset management divisions (DWS Group GmbH & Co. KGaA in Germany and DWS Investment Management Americas (DIMA) in the US).
On 25 September 2023, the SEC released the Settlement Order with DIMA. DIMA marketed its managed funds that contained “ESG” in their name as “ESG dedicated.” An “ESG dedicated” fund was subject to an “ESG Integration Policy” and an “ESG Engine” among other proprietary policies and tools. The Policy and Engine were advertised to current/prospective clients and investors. In short, the Policy set out the minimum ESG standards to be used in assessing investments. The Engine was a proprietary tool that letter rated (i.e., A to F) ESG third-party vendors according to six ESG rating categories.
The SEC’s primary concern centred on the allegations that DIMA lacked policies and procedures (i.e., controls) to ensure the Policy was followed, the Engine consulted, and ESG factors were documented and incorporated in valuation models and investment decisions.
The SEC considered this to be a wilful violation of various provisions designed to protect investors from misleading statements, fraud, and deceit. In settlement of the SEC’s investigation, DIMA agreed to pay USD19 million. This penalty is significantly higher than the USD1.5 million fine the SEC imposed on BNY Mellon Investment Advisor, Inc. a year earlier, for similar conduct. It should be expected that ASIC will eventually pursue this type of greenwashing case. These cases may not be easy to identify, as the lack of controls will not be readily identifiable from external facing documents.
