Bracing for the New Wave of ESG Whistleblowing

Despite growing pushback against Environmental, Social and Governance (ESG) investing, companies must face the fact that ESG isn’t just a trend to wait out. Alarm bells began ringing in March 2021 with the creation of the Securities and Exchange Commission (SEC) Climate and ESG Task Force–signifying real consequences on the horizon for companies that attempt greenwashing. Just over a year later, the Task Force brought the hammer down on BNY Mellon in the first punitive action on ESG matters, opening the door for an incoming wave of whistleblowing for companies that ignore their due diligence. 

The first fine for ESG mistakes

The SEC’s investigation into BNY Mellon found that between July 2018 and September 2021, the adviser implied or stated that investments in multiple mutual funds had been through an ESG quality review when in reality a significant number of the investments had no ESG quality score at the time of investment.

Misleading investors in this manner resulted in BNY Mellon being fined $1.5 million. Although this is only a drop in the bucket for the investment adviser, it’s also a warning that the SEC Task Force has teeth and the ability to enforce consequences for misconduct along ESG lines.

A worldwide phenomenon

Although the catalyst for the SEC’s BNY Mellon investigation is currently unknown, another high-profile ESG crackdown was spurred by a high-ranking whistleblower. Just days after BNY Mellon’s fine, German officials executed a raid on Deutsche Bank offices and found evidence to support prospectus fraud. 

DWS executive Desiree Fixler, formerly the bank’s head of sustainability, reported in 2021 that the bank was advertising ESG financial products as sustainable and environmentally friendly, without any evidence to back the claims. Although investigation is ongoing and DWS rejects the allegations, the event caused stock prices to slide and managing the reputational fallout has been increasingly difficult. The fallout has been significant enough to cause the bank’s senior executive for asset management to resign from the organization.

What drives whistleblowing?

In the case of DWS, the decision to blow the whistle was the result of deep ESG knowledge and strong personal convictions. In an interview, Fixler confirmed that “it’s about standing up for what’s right” and that the sticking point was “the difference between what the company says internally and what it says externally” when marketing ESG strategy. 

While personal conviction is often reason enough to choose to blow the whistle, the promise of financial rewards adds a significant layer of incentive for employees at all levels. For example, the SEC offers whistleblowers rewards of 10 to 30 percent of the money collected in cases where more than $1 million in sanctions are ordered, and with the new ESG Task Force in place, more people will have a reason to blow the whistle when they might not have in the past. 

Heading off risk with responsible metrics

The common denominator of the BNY Mellon and DWS cases is an obfuscation or a complete lack of ESG ratings and metrics to back them up. Companies of all sizes are under pressure to show focus on ESG considerations, but a lack of standardization and systemic review are hamstringing many and in some cases causing organizations to make ethically questionable claims whether purposefully or not. 

For leaders who are invested in ethical stewardship of ESG matters, the root of the whistleblower threat is gathering the right metrics consistently and rigorously. Keeping tabs on third-party elements of the supply chain is one of the most challenging parts of measuring ESG, and ethiXbase360 is here to help. Our innovative platform allows you to manage third-party ESG compliance from initial onboarding through continuous reporting and analytics, enabling you to minimize the financial and reputational risks of internal whistleblowing with maximum efficiency as ESG compliance requirements mount.

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