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Lessons Learned From the "Deutsche Bank" Affair
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At the end of May 2022, Deutsche Bank faced scrutiny for greenwashing, serving as a strong wake-up call to all financial institutions, urging them to play an active role in fighting climate change.
Instead of only focusing on Deutsche Bank, we would like to shed light on the mechanisms that led to the indictment of this banking institution. The goal is to address this issue in a constructive way, and to allow those who wish to do so to evolve accordingly.
What happened to Deutsche Bank? On what basis was this greenwashing investigation opened? How can we prevent this from happening again?
Let’s find out.
Deutsche Bank's Greenwashing Scandal
The Facts
On 31 May 2022, German police conducted raids on Deutsche Bank (DB) and its asset management subsidiary (DWS) over suspected greenwashing. The alert was raised to the Swiss Financial Supervisory Authority (BaFin) and the US Securities and Exchange Commission (SEC) by the former head of sustainability at DWS, Desiree Fixler.
In this case, the accusation was levelled against the asset manager for exaggerating the scale of its ESG (Environmental, Social, and Governance) investments.
What was Deutsche Bank accused of?
The financial institution underwent a fraud investigation. In short, some of its investment products were labelled as sustainable on sales prospectuses, despite ESG criteria not being clearly taken into account for most of these products. In other words, their sustainability was not based on concrete criteria.
“ In the end, some investment products were portrayed as 'greener' and 'more sustainable' than they actually were. (Frankfurt Public Prosecutor's Office, 31 May 2022 - Le Monde newspaper). ”
What happened next?
It's not for us to say, it's up to Deutsche Bank. It's worth noting that the bank denies deceiving its investors. Nevertheless, following the incident, the head of DWS, Asoka Wöhrmann, resigned.
In this case, the rapid change in the financial world undoubtedly played a role. For example, in 2020, DWS’s annual report indicated ESG portfolios worth €459 billion. By 2021, this figure fell to €115 billion in ESG assets, a significant decline likely attributed to the strengthening of European regulations concerning the transparency of these products. As a reminder, 10 March 2021 marked the implementation of European Regulation (EU) 2019/2088 on sustainability-related disclosures in the financial services sector.
Also known as SFDR (Sustainable Finance Disclosure Regulation), the purpose of this regulation was to standardise and strengthen transparency obligations for entities marketing or advising on specific financial products (ACPR Review, April 2021).
As far as Deutsche Bank is concerned, it appears that the virtuosity of many of its assets may have been overvalued. Was this due to error, negligence, ignorance, or cynicism?
The problem is that these investment products do pay off very well. According to Bloomberg Intelligence forecasts, by 2025, all of these assets are expected to exceed $50 trillion, equivalent to one third of the world's assets under management.
What is a greenwashing charge?
Greenwashing is a fraudulent technique employed in marketing and communication, aimed at promoting a brand as more responsible, ethical, and environmentally friendly than it actually is.
“ For companies that intentionally use greenwashing, the goal is to cultivate an environmentally responsible brand image, without making the necessary efforts to actually embody it. However, it happens that some companies engage in greenwashing due to clumsiness, negligence, or even a lack of understanding of the subject. ”
In France, greenwashing is a criminal offence punishable by two years' imprisonment and a fine of €300,000, which can be increased (based on the benefits gained from the offence) to 80% of the costs associated with producing the advertising or the practice guilty of greenwashing (Article L.132-2 of the Consumer Code).
In addition, since 1 January 2023, the use of carbon neutrality claims in France is regulated by law. Organisations found in violation are subject to a fine of €100,000.
Why are the financial and banking spheres receiving so much attention?
In 2021, a report from WWF and Greenpeace found that the investments held by the UK’s biggest banks and investors emit 805 million tonnes of carbon per year.
Without knowing it, many citizens participate in financing fossil fuels, the main contributors to global warming. Indeed, many banks support the exploitation and use of these polluting energies through their customers' savings. This support is evident in their financing and investment decisions.
However, according to the 13th Banking on Climate Chaos report, French banks emerged as the leading contributors among European financial institutions to fossil fuels in 2020. Since 2016, they have reportedly provided financial support amounting to $350 billion toward fossil fuel initiatives.
“ To be fair, it must be stressed that the immediate abandonment of the use of fossil fuels does not seem to be conceivable as it stands. Global energy needs do not make this hypothesis credible. In order to move away from fossil fuels, an alternative system must first be created – ideally based on the use of renewable energies. However, the reality of climate change and the role that fossil fuels play in this crisis require us to find a way to phase them out as soon as possible. This is where tensions arise, as many perceive banks to be dragging their feet on this issue. ”
According to analysts, the ESG fund market is expected to grow by $20 trillion over the next 20 years. In short, the more global warming is in the news, the more successful this type of asset becomes...
A financial windfall. But at what cost?
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Key Takeaways
Deutsche Bank's case lies within the jurisdiction of the courts. Furthermore, for other banking institutions, this case should serve as a clear signal for change. If there is one takeaway from this event, it is that the issue of ecological transition has become too serious to dismiss certain accusations lightly or to overlook developments in the banking sector's transition. The sector has begun its transformation, as evidenced by the gradual emergence of the ethical banking model. Those who wish to do so are welcome to partake in this transformation. It's not too late.
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