June 3, 2022 - ESG and Climate News

Crackdown on Greenwash

A major crackdown on greenwashing – the practice of over-hyping sustainability credentials – came to a head this week when Germany’s largest asset manager (DWS - a subsidiary of Deutsche Bank) was raided by police following allegations it misled investors on ESG considerations in its investment practices. The day after the raid, CEO Asoka Woehrmann stepped down.  

Financial regulators had been investigating DWS for defrauding investors by exaggerating the ESG credentials of its investments. German prosecutors alleged that DWS sold investments as "greener" or "more sustainable" than they were. The raid and resignation at DWS followed a hefty settlement between the US Securities and Exchange Commission (SEC) with BNY Mellon for selling ESG financial products without sufficient due diligence.

Last week, the SEC unveiled new rule changes aimed at preventing misleading claims made by ESG funds. The rules will modernize and enhance the “Names Rule,” by requiring any fund with ESG in its name to clearly define the term and ensure that 80% of the assets in the fund adhered to that definition.

Critics say these changes do not go far enough to solve the greenwashing problem. Andrew Behar, president of activist investment firm As You Sow, said “The new rule acknowledges the problem but does not fully address it. Investors still need clarity on exactly what ‘sustainable’ and other terms like ‘fossil-free,’ ‘low-carbon,’ and ‘ESG’ mean.” This week’s Full Disclosure Newsletter takes a deep dive into this topic.

Welcome to the Party

The regulators join a chorus of critics targeting companies for greenwashing. Environmental advocacy groups in the Netherlands filed legal action against Dutch airline KLM, claiming that the airline misled the public about the sustainability of airline travel. The suit targets KLM’s Fly Responsibly campaign for allegedly misleading customers about the company’s commitment to net-zero. At issue is KLM’s reliance on future advances in airline fuels and offsetting credits to reach net-zero by 2050 while increasing flights.

The world’s largest sporting competition – Football’s (soccer) World Cup – has also been called out for greenwashing. FIFA (the world football association) and the host country Qatar claimed the upcoming 2022 event will have a net-zero carbon footprint. But Carbon Market Watch raised red flags, stating the net zero claim ignores major sources of emissions and overestimates offsetting emission credits.

Even the European Commission has been called out for exaggerating climate commitments. The European Court of Auditors reported that the European Commission overstated expenditures on climate action by at least 72 billion euros between 2014 and 2020, adding that the EU’s climate reporting mechanisms were unreliable. 

Divestment Isn’t Working 

Uncertainty created by greenwashing creates doubt about where and how to invest in the low carbon transition. The simple approach is to divest from all fossil fuel companies, but a new study by private equity firm Carlyle Group concluded that divestment raised the cost of capital for fossil fuel companies, while doing very little to reduce the demand for oil and gas. 

Institutional Investors Stay The Course

Despite the bumpy road, institutional investors continue to make progress towards net zero. Vanguard announced that $290 billion of its actively managed assets are invested in line with net-zero emissions by 2050 (in context, Vanguard manages $7.2 trillion - mostly in passive funds). Overall, asset managers have committed $16 trillion of assets to achieve net-zero greenhouse gas emissions by 2050 or sooner, 39% of their total assets, according to the latest report from the Net Zero Asset Managers Initiative. Also, Bloomberg launched a suite of benchmark indices aligned with the Paris Climate Accord goals. The criteria include a minimum reduction of 50% greenhouse gas (GHG) intensity as compared to the market index and a 7% minimum yearly GHG intensity reduction.

Shareholders to the Rescue

Despite windfall profits driven by soaring fuel prices, shareholders at ExxonMobil and Chevron voted in favor of climate reforms. Exxon shareholders approved a measure to stress-test the company’s long-term assumptions on oil and gas prices against the emissions cuts the International Energy Agency says are necessary to achieve net-zero emissions by 2050. With the support of management, Chevron shareholders overwhelmingly (98%) supported a resolution to report on the reliability of methane measurements. 

Reflecting on both votes, Tracey Cameron, director of corporate climate engagement at Ceres commented: “Climate risks are also very significant financial risks — that’s no secret among investors. While many companies disclose climate impacts in certain places, those disclosures are too often absent, inadequate, or inconsistent in financial statements, fundamentally compromising investors’ ability to effectively manage and allocate their assets. Despite their claims to the contrary, neither Chevron nor Exxon have delivered on these shareholder requests, and Exxon’s investors today were clear — that’s not good enough.”

It is not just the E of ESG being brought up by shareholders, social issues also had a good showing in this year’s proxy season. McDonald’s shareholders voted down two director nominees backed by activist investor Carl Icahn as part of his effort to change the way the fast food giant’s pork suppliers treat hogs. Although the resolution did not go through, animal-rights activists claimed it was a win as it brought attention to the issue. 

In the aftermath of the horrific mass shooting in Texas, shareholders of Connecticut-based gun maker Sturm Ruger are voting on a proposal that states because of “the inherent lethality of firearms,” Ruger must hire an outside firm to study its impact on human rights, “above and beyond legal and regulatory matters.”

ESG is a Political Football

While shareholder activists continue to propose ESG resolutions, conservatives are increasingly pushing back. The culture war in America is spilling over into the ESG movement. In the wake of Florida Governor DeSantis’ punishing the Walt Disney Company for their opposition to the state’s “don’t say gay” law, now red states are banding together to punish companies that lead on climate action. Conservative lawmakers in 15 states are promoting legislation similar to a Texas law that bars the state from doing business with companies that are boycotting fossil fuels. 

And the pushback is rippling through the private sector. After Tesla was expelled from the ESG version of the S&P 500 Index, CEO Elon Musk responded by saying ESG is “a scam” spawning a faction of business leaders to break ranks and paint ESG as mere greenwashing. Desiree Fixler, former head of ESG for DWS (notably, the investor raided by police this week for false ESG claims), says that the abbreviation has become meaningless.

The recent speech by Stuart Kirk - head of responsible investing at HSBC Asset Management - fueled the divide when he declared climate risk was simply “not a financial risk that we need to worry about.” Kirk was quickly suspended by HSBC for his remarks, but it reflected a growing willingness to question the prevailing wisdom of new capitalism.

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Notable news of the week:

• The Nigerian town that stood up to big oil and won. After a 2004 oil leak from a pipeline in the Nigerian town of Goi, the town took on Royal Dutch Shell. Following nearly 20-years of  legal battles, Shell finally paid the local Ejama-Ebubu people approximately $111m in compensation for damages from multiple oil spills that occurred since the 1970s.
• An investigation from Politico’s E&E News found systemic favoritism from FEMA towards wealthy and white people when seeking flood grants. In a major blow to environmental justice, the key findings state that in 12 of the 18 states analyzed, more than half of the FEMA funds have gone to communities that are overwhelmingly white or wealthy. 
• Google Cloud and the power company Engie have announced a partnership that will harness AI to predict wind and accelerate wind energy development. The pair believe this will have a huge benefit for wind power production and its competitiveness in the energy markets. 
• Strangely, a man dressed as an old woman smeared cake on the Mona Lisa this past week in an act of protest. Apparently, the scene was to bring attention to the climate crisis, as he’d been shouting “think of the Earth” while being escorted out by security. 
• I commented for ESG Investor’s ESG Explainer: SEC Lays Its Cards on the Table, on what you need to know about the SEC’s climate disclosure proposals.

Notable podcasts:

• I am thrilled to announce my new podcast “Sustainability Decoded,” with Tim and Caitlin. In unstructured interviews with ESG leaders, we attempt to balance deep dives into the complex world of ESG (me) with explainers that help listeners understand (Caitlin) and, therefore, engage. Caitlin Kinney, a Gen Z climate activist, and I cover important stories and trends in ESG and the climate. Whether you’re just dipping your toe or are far along in your journey, we aim to inform on the latest trends in sustainability — so we can get to work! Our podcast starts on June the 7th and is available on Spotify, Apple Podcasts, and all other podcast hosting services.

• In this week’s BBC Radio 4’s Costing the Earth, host Tom Heap assesses the environmental impacts of the war on Ukraine. He talks to a Ukrainian environmentalist who has temporarily abandoned his conservation project around Chernobyl in order to help with the humanitarian aid effort.

Notable events:

• On June 7th, I will be speaking at Fast Company’s Annual Impact Council Meeting where this year’s theme is “Sustainable Impact,” highlighting the ways businesses and organizations can engage in long-term thinking about issues ranging from workplace diversity, climate change, income inequality, and more.
• My colleague Kristina Wyatt will be speaking at this year's National Investor Relations Institute’s (NIRI) Annual Conference on the 5-7th of June. The NIRI Annual Conference is the world’s largest and most comprehensive IR event, with two and a half days dedicated to your professional development and networking. You can register for the event here.
• Another colleague Anne Reaney will be speaking at the Reuters event Responsible Business Europe 2022, which will be held June 8-9th at the Hilton London Tower Bridge, London, UK. To register for the event click here.