Sustainable Views: Lessons from a whistleblower

Welcome to a new season of Sustainable Views, the podcast for sustainability experts or anyone really interested in getting into this area. Sustainable Views more broadly is a title part of the Financial Times Group. I hope many of you will receive our daily newsletter. If not, I'll add the link in the show notes. We cover all aspects of policy and regulation involving environmental, social, and governance principles. In this second season of our podcast, we'll zoom in on education. In particular, what skills and knowledge make for a competent sustainability professional? What should companies as well as policymakers look for when assembling ESG teams? To get us started, I spoke to one of the best-known and most credible names in this area, Desiree Fixler. I'm Silvia Pavoni, your host. Enjoy the show. If you're already active in ESG, you'll be very familiar with Desiree Fixler. No introduction needed. If you're new to this area, Desiree is the whistleblower that led to multiple investigations into the sustainability credentials of DWS, the asset manager part of Deutsche Bank. At one point, the German police got involved too. Desiree, who used to be DWS's global sustainability officer, accused a former employer of greenwashing. The US Securities and Exchange Commission agreed with her, and in September this year, it fined the asset manager a whopping $19 million for ESG misstatements, the SEC's largest ever ESG fund to date. So Desiree knows a thing or two about sustainability and ESG investing. Let's start from the beginning. How should we define sustainable finance?

A lot of folks define it as investment decisions that consider or integrate environmental, social, or governance factors. Now, I'm sure there are some nuances to what I just said, Maybe instead of consider, it's integrate. Maybe they further define it to say, for, you know, the following objectives: financial performance or environmental and social impact. Personally, I, I think now we need to move away from these umbrella terms. I don't care if it's sustainable finance or responsible investing or ESG investing. I think that these umbrella terms have caused a great deal of confusion, conflation, and actually exploitation. And I've said this, you know, once or twice before, and I actually think we need to go back to just precision language rather than to try and find some umbrella category for very different things. You know, what is climate action? What is fair labor practices or, You know, you know, diversity, inclusion. I think we just go back to just what are we talking about instead of trying to find this classification. And we just talk about here's an investment in battery storage, here's an investment in clean cement, you know, here's like we're going to, you know, finance this solar power plant and talk about the attributes of the investment, the reasons why, you know, risk mitigants. As opposed to, let's, you know, group this under some umbrella term where there are differing definitions. And let's face it, those three letters E, S, and G together have been weaponized. So, so I'm all for moving away from the definition of sustainable finance. Let's just go back to like first principles and use precision language.

What she refers to there with weaponized is the politicization of ESG investing, which in the US has been used by by Republicans as a way to counter so-called woke capitalism. But whether weaponized or not, ESG and the confusion around it has challenged companies' leadership.

I mean, let's face it, at the end of the day, most companies have been set up for profit, and there's nothing wrong with that. They weren't set up, you know, to have like double materiality disclosure. You know, they weren't set up to save the world. They were set up to make a good widget or a good service. That's it. And of course they wanna avoid doing harm because I mean, that's a boomerang. You know, clients will disappear, there are lawsuits, and the regulator will clamp down. So that's never a good place to be. But they were set up, of course, for their stakeholders. You don't want unhappy employees and you certainly don't want an outraged community, you know, or customers. But most companies are set up just to perform financially, to adhere to their business model, make good products and services and make money. B Corps are something very different. I mean, that's where you're moving into companies that have a social or environmental mission, and that's in their corporate statutes, right? Where they are about, they might be like a for-profit company, but they're also about looking at positive externalities. They're looking at that social and environmental impact. They are set up to report out under CSRD and report out on both their financial materiality and their impact, but other companies aren't. And I think that, you know, we've kind of lost the plot here and we move away from, I always like, I'm gonna probably say it over and over again, first principles, like what is the business model of the company? You can't change it. And that's where I think a lot of companies got in trouble. Because they were becoming, they were grandstanding and over-pledging on both environmental and social objectives, and they didn't have the goods to back it up. They weren't set up to do it. And that's where, you know, this whole explosion of greenwashing happened over the last 2 years, right? There was this concept, there was that Business Roundtable way back when, you know, in the US to talk about the new supremacy of stakeholder capitalism versus shareholder capitalism. But you know, how many companies like adapted that new business model? How many boards, you know, voted on it? They, they had the old model that was, that was an interesting aspiration and maybe conversation, but most companies are not set up to save the world and we need to let that sink in and stop attacking them, right? If they're not doing that, they were, they were set up to make good products and, and widgets, satisfy their stakeholders, And do no harm.

For anyone interested in further readings about CSRD, the EU's corporate sustainability disclosures rules, and ESG reporting in general, I will add links in the show notes. So companies are struggling with the concept of sustainability and the changing expectations placed on them by investors, customers, as well as regulators. Who should they turn to? And should regulators begin to pay attention to the skills required in sustainable finance and sustainability more generally?

Increasingly, you know, companies are transitioning and becoming sustainable and creating sustainable or green products are increasingly a material part of their, their, their bottom line. And if that's the case, then of course you need the, you know, respective competence, right? There's always a competence test by, you know, industry watchdogs. You need that competence throughout the firm and certainly within the C-suite and at the board level. Should regulators mandate that skill or that training? No, I think that there should just be a competence test. You know, again, like a lot of, a lot of industries are regulated and that competence, you know, needs to be there. I think regulators can encourage training and it's indispensable for any company embarking on a transition journey or company that is pumping out a lot of sustainable products and services, that it's indispensable to have that expertise embedded throughout the company, right? Because this is core business adaptation and you need to have that expertise at the board and C-suite level. And, and by the way, like the one-day course doesn't suffice. You know, you need, you know, you, you sometimes like a little information is most dangerous, by the way. You need to have true expertise, you know, someone who's practiced it, not someone who's just taken that one-day course. And I think regulators and, you know, should provide those sort of guidelines. And certainly if there is any sort of violation, that is probably, that should be part of the remedial actions, right? So if, you know, if a company, you know, gets busted for greenwashing, then yeah, I think that Part of the remedial actions from the regulators should be like, you need to upskill right now, you know, throughout, you know, the company entry level to the top. And, you know, you need a better handle of this, you know, at the board level.

Are companies taking those training or upskilling needs seriously?

I think companies are changing and recognizing they need to do a better job with training because it's becoming increasingly a regulated market, right? So whether you're talking about the names rule in the US or you're talking about clearly CSRD and SFDR, wow, look at this alphabet soup. Oh my God, so many acronyms. You know, here looking at proposed, you know, regulation here in the UK and many other jurisdictions, by the way, companies have clocked that this has become, you know, a skill from nice to have to need to have. And they have to have mandated internal training programs as they have if you're in financial services for, you know, anti-money laundering, etc. This can be a fraudulent activity that can happen intentionally, but also unintentionally. And folks need to be aware and need to be sensitive, right, and aware of the red flags, right? You know, and, you know, where you as a company need to do a deeper dive to ensure that, there's integrity and procedures and, and what's going down. So you have regulation and then, you know, secondly, you also have a great deal of, of incentives coming out of government. So I know it's spoken about a lot, but, you know, we just talked about the stick, but there's also the carrot, right? So, you know, you need companies to be compliant, but also there's tremendous business opportunity. I mean, trillions of dollars are needed to transition. And you know, you've got incentive pieces of legislation like the Inflation Reduction Act, right? So you also need to train up your people not just to behave, but also spot opportunity and pounce. You know, you need that creativity within your corporation. So I think that training is important because you need good risk management, right? You need your folks to be aware not to greenwash. We've seen an example like the DWS case, that was catastrophic for the company. Like some people are saying like, oh, it's only $25 million from, you know, the SEC. But please note, right, there was a 14%, you know, you know, tanking of their share price and it never recovered. Tens of millions of euros were spent in legal defenses, untold like lost client revenue, 2 years of harsh embarrassment, you know, throughout this investigation. Every conversation, I'm sure, right, that they were having with the marketplace. At some point there was the question about the investigations. So just a miserable experience. And then finally, you know, in addition to very high penalties, financial penalties, right, it kind of wiped out senior leadership at that company.

The $25 million Desiree mentions includes an anti-money laundering fine in addition to the $19 million ESG misstatements penalty. The SEC issued against DWS. Desiree thinks that companies now tend to be more sober about sustainability.

Because of these enforcement actions, again, extra regulation and tremendous value creation opportunities, that companies are in a much better place. They're a lot more sober when it comes to sustainability. It's not this grandstanding PR exercise anymore, and they've clocked that they have to do a better job at training for these aspects. And also, by the way, Younger staff expect it, understand that there is a very different mindset to— I mean, look, I'm older, I'm Gen X, but, you know, millennials and Gen Z have a very different approach to work. You know, they expect, they want to be values aligned and they expect training in this area. They will have increasingly the mindset that every job in finance is a sustainable finance job. So it's also crucial for staff retention. So if you ask me, do I think there's more greenwashing? From my perspective, the answer is no. I think there's probably a little bit more confusion in the market, but that's healthy confusion and companies trying to get it right today. So I, again, I think we're in a better place. Once you kind of level set, you mark to market, you know where you stand, you know, you can be— your journey is going to be a lot more credible. There needs to be like more engagement with the public sector. I don't think there was enough in Europe. I think there were too many consultants and politicians involved and not enough practitioners. And I think that the most of what has come out from Brussels, like from, from Europe, SFDR and CSRD, I think at the end of the day, it's an absolute train wreck. I think it's a calamity. I think that it's been an unnecessary bureaucratic tax on society. What was well-intentioned, right, turned into almost an enrichment scheme for these consultants and, and, and, and politicians. And they just weren't listening anymore to market practitioners. A lot of Europeans criticized the US for not doing more. They were certainly slower to jump in. But when they did, I think they got it right. The US got it right in both the carrot and stick approach. Let's not overregulate, right? Death by like 20,000, you know, sustainable disclosures. Let's just make the case that we need fair disclosure, like the widening out of the names rule that just passed.

This is definitely a complex area for everyone, including regulators. Getting the right mix of skills seems to be a trial and error exercise. This may ring true for companies looking for or ESG experts?

Sometimes, you know, the ESG team or sustainability team comes from the world of academia, the world of like nonprofit, and they have not actually been a finance practitioner and they're unaware of financial regulation. So, you know, today, remember, most of the greenwashing that's happening is coming from the ESG people. Right? And I think a lot of it is unintentional, but they'll put out a policy, but because they don't understand the business, they're not embedded in the business, they don't see that there's non-compliance. Additionally, they never got trained in, you know, in the securities industry, right? And so they don't even know about, you know, it's not a good practice like to cherry-pick activities. You know, I see that all, all the time. So You know, training needs to be like, you know, again, that's just, it's just kind of going back to common sense. You need competent people in the seat and ESG people, like whatever job you're doing, first and foremost, you need to be competent in that job, whether that's a compliance officer that is in operations and settlement sales and portfolio management, and you have expertise in sustainability. Right. And likewise, the regulator, right, needs to have a background, of course, and like understand regulation and legal matters. But you should have some sort of experience in operating in the businesses. Right. There's just— there's a disconnect if, you know, we all know that we all speak with our own jargon. If you don't understand your supervising a business and you don't really understand all the aspects of that business, there's a disconnect.

Finally, the ESG team has been formed, all the right people with the right skills are there, but of course, things can still go wrong. How do you as a company or indeed as an ESG expert spot greenwashing?

So I think, you know, companies need to, you know, take a step back. And by the way, you don't need to you know, call in the, you know, consultant brigade. Just consider, you know, someone in the C-suite, on the board level, what is the approach to sustainability? Is this just an extension of CSR, or is this really about core business transformation adaptation, similar to kind of like adapting to Dodd-Frank? So then, you know, again, you look at your organizational setup. And make sure that you've got these skills embedded throughout the firm. So it's like front, back office control groups. Make sure you have the right governance structure. Make sure compliance is keeping an eye on all public disclosures and material disclosures go the regular way through the CFO office. And I'm going to make this, this point again. Please don't overrely on consultants. I mean, that you just make yourself so vulnerable. To greenwashing, right? You know, a lot of companies think that, you know, you bring them in, it's cheaper, it's faster, and sometimes you can outsource your accountability and just blame it on one of the big four. You can't. I think that the DWS lesson— there were so many consultants running around, right? Everyone thought they could just blame it on, you know, X or Y company. They couldn't, you know, they got busted for greenwashing. So no overreliance on consultants. Make sure you have expertise at the C-suite level and board level. Make sure you have quality of disclosure, define everything. Make sure there's enforcement of policies. Make sure, you know, your external communication can be backed up with data evidence and key numbers. And make sure you have also integrity in your whistleblower channels.

And if everything else fails and you, the ESG experts, end up becoming a whistleblower, what happens next?

I've seen the bad and I've seen the really good. You know, there are really, you know, great companies out there. You know, take JPMorgan, right? It has, you know, a very— has a high standard when it comes to corporate governance and certainly risk management. You know, unfortunately, other companies fall short. So, you know, depending on where you're at, you know, there's going to be different like advice You know, if you're at a, you know, a company that takes risk management seriously, you're gonna be okay. You can raise your, your concerns, raise them unemotionally, stay data-based, evidence-based, right? And, and you raise them through the appropriate channels and you raise them with a, a mindset to solve the problems, not to blame. Don't play the blame game. It's all about companies and human beings make mistakes. Right? And you raise the concerns to resolve them, to bring the company to a better place. Unfortunately, other companies, right, want to shoot the messenger. You know, they don't want to, like, hear no evil, see no evil. And, you know, they're all about cronyism and groupthink. And there, you know, it's a little bit trickier. Understand that your job, you might be vulnerable. Again, be still, the same advice, be unemotional. Be, you know, data-based. And data-based meaning, you know, make sure that your allegations or your concerns are backed by risk reports, email chains, strategy presentations, and decks. You've recorded when the meetings happened, who were, you know, who was there. Know your rights. Here's another important point because, you know, a lot of countries like the US, like the UK, has whistleblower protection. Germany is finally— has now, you know, adapted the EU directive under duress, of course. And let's see if they abide by that. But again, a lot of countries have whistleblower protection where companies can't retaliate against you. So you have to know your rights from an employment standpoint, whistleblower standpoint, and also industry watchdogs. You know, in the US, you know, you have the SEC that's very switched on. Very accessible. And there are certain times if, for example, you are fired, dismissed, and you need legal help, you know, if a regulator steps in to investigate your company, at times your legal fees are paid by your former employer. So you need to know how that works because I know a lot of people are afraid to stand up because they think the legal fees and the time will crush them, there are often situations where actually you won't have to pay, you know, those legal fees. So I have a lot of, you know, tips for others. You know, there are some things that I did well and there's some things I didn't know and I wish I would have known. So I have that list for others. But, you know, again, please note that there are a lot of good companies out there.

So ending on a positive note, Sustainability and sustainable finance are complex areas, but as Desiree points out, there is progress and there are good companies out there. That's it for today's show. I hope you enjoyed it. You'll find links to any relevant articles in the show notes. Stay tuned for our next episode, where we'll host another highly recognizable name, though perhaps a new one in sustainability. Until then.