Opinion: ‘Greenwashing’ is tempting for storytelling CEOs

Chief executives have many responsibilities, but one of the most valued is convincing investors and others that their companies are performing well financially and doing good in the world. If cracks appear in these stories, there will be problems.

Doing good is often measured in environmental, social and governance (ESG) terms, and the German asset management group DWS seemed to be setting an example until recently. “We put ESG at the heart of everything we do,” stated chief executive Asoka Wöhrmann in her 2020 annual report.

Now the asset manager is accused of “greenwashing” for exaggerating the ESG credentials of its investment funds, and its Frankfurt offices were searched this week by German police on suspicion of prospectus fraud. Wöhrmann then resigned.

He denies wrongdoing and proclaimed earlier this year that DWS’ push into ESG investing was “a true success story.” But the raid will send chills through some CEOs who routinely trumpet how seriously they take climate change and how their companies are leaders in social responsibility. Some will need to weigh their words more carefully.

Shutting up is not an option. Creating a narrative was once a side issue for CEOs, who focused primarily on operational issues away from the public eye. But as investor and media scrutiny intensifies and companies need to constantly communicate with shareholders, customers and employees, the CEO has become the ultimate storyteller.

Anne Mulcahy, former chief executive of Xerox, once reflected that a unifying corporate story “creates a powerful impulse – the feeling that people are capable of doing good things” and that matters more than “the accuracy or elegance of the strategy.” “. A moving narrative always trumps a PowerPoint presentation, even when it reflects the underlying reality of the company.

A story of ethical effort triumphed for a time at WeWork, the office-sharing company formerly run by “guru” Adam Neumann, portrayed in the Apple TV drama “WeCrashed.” “Our mission is to raise awareness of the world,” he declared in his 2019 IPO filing; its value then plummeted as investors scrutinized the financial fine print.

Many bosses like to brag, as does Markus Braun, the former chief executive of German payments group Wirecard before its collapse in 2020 (Braun was accused of fraud earlier this year). One study found that publishing financial statements satisfied an “intense need to have their superiority constantly reaffirmed” among highly narcissistic CEOs.

In fact, the more extravagant the conversation, the more likely it is that something is going wrong. Another study found that CEOs of companies that handled accounts tended to use words that conveyed extremely positive emotions, such as “awesome,” “awesome,” “fabulous,” and “huge” on conference calls with investors.

The rise of corporate social responsibility, with an estimated $2.7 trillion in ESG asset investments, is a dire temptation for self-aggrandizing CEOs. Consistently hitting financial goals is tedious, but promising to improve the world seems heroic.

It sits well with investors and attracts employees who want to believe they work for an ethical company. Everyone has a comforting feeling when they are told they are on a high path.
Another attraction is that greenwashing is difficult to define. Financial metrics can be manipulated, and companies often adopt their own – WeWork was known for its creative accounting – but a company’s cash is traceable (or not, in the case of the €1.9 billion missing from wirecard).

ESG investment is much more difficult to measure: although many rating agencies now try to do so, approaches vary. As Gary Gensler, chairman of the US Securities and Exchange Commission, said last year, there is “a huge variety of what asset managers might mean by certain terms or what criteria they use.”

DWS has flourished amid ambiguity, promising to be “ambitious, innovative, and unrestricted in our forward thinking.” Afterwards, Desiree Fixler, the group’s former director of sustainability, accused him of misrepresenting its ESG capabilities. “We do risk management and we do it poorly,” wrote another executive in an internal email.

The company has yet to be charged with any crimes, but one lesson is clear: greenwashing is not a risk-free form of boasting. The SEC this month fined the investment advisory arm of BNY Mellon $1.5 million for withholding information about ESG funds, and proposed new rules.

There are also broader risks. Most scams only concern those who are directly affected, but false claims to be ethical bother everyone. Volkswagen has paid €32 billion in fines, legal fees and damages to customers after it was discovered in 2015 that it was hiding diesel emissions.

Making the world better is admirable, but lying about it is hateful. Many CEOs have adopted St. Augustine’s chastity approach to social responsibility: pray to be virtuous, but not yet. Time is running out.

Translated by Luiz Roberto M. Gonçalves