The DWS Group, which is listed on the German S-Dax, had presented fund products as "sustainable" or greener than they actually are and was promptly fined by the US Securities and Exchange Commission (SEC). Fine in an amount of 19 million euros due to ESG violations and greenwashing sentenced. In addition, the company was fined six million euros for not having sufficient money laundering controls in place. The company's legal fees alone in this case have so far amounted to around 39 million euros and it has lost one billion euros in value on the stock market. Added to this is the loss of reputation and possible claims for damages from investors. In Germany, the financial supervisory authority BaFin and the public prosecutor's office are still investigating the DWS Group. Mauricio Vargas, financial expert at Greenpeace, explained: "The court ruling clearly shows that greenwashing and consumer deception are not trivial offenses."
Authorities take stronger action against ESG violations and greenwashing
According to the report, the current crackdown in the USA is tougher than in the previous year, when the major US bank Goldman Sachs was sentenced to 4 million dollars was condemned. They advertised two of their funds as "ESG-compliant" in their asset management unit of the Wall Street Institute, although neither ESG standards were set by them nor were there any guidelines or strategies in place. Goldman Sachs had declared them "green" and "sustainable" ESG funds without further ado. In Germany, Luxembourg-based Commerz Real Fund Management S.à.r.l. was warned by the Stuttgart Regional Court (36 O 92/21 KfH) at the beginning of 2022 to cease and desist its misleading advertising for sustainability funds under threat of a fine of EUR 60,000. It had advertised a specific impact of investing in the advertised funds on the personal carbon footprint.
CSDDD to form the framework for CSRD and EU taxonomy
On February 23, 2022, the European Commission was the first EU institution to present the proposal for a Corporate Sustainability Due Diligence Directive (CSDDD) published. The aim of this proposal is to legally oblige companies operating in the EU to comply with Human rights and environmental protection standards in their global Supply chains and to better penalize ESG violations and greenwashing. This proposal represents an important step towards sustainable business practices under uniform European conditions and complements existing regulations and other ongoing regulatory initiatives such as the Corporate Sustainability Reporting Directive (CSRD) with its CSRD reporting obligation and the EU Taxonomy Regulation.
European standardization by 2026
The CSDDD therefore links the CSRD reporting obligation with the Taxonomy and is attempting to harmonize the regulations. Overall, companies should expect that the ESG requirements continue to rise and Greenwashing pursued even more rigorously will be. The EU's draft directive on environmental claims (Green Claims Directive) published on March 22, 2023 also aims in a similar direction. Coordination talks are currently taking place between the EU Commission, the EU Parliament and the European Council on the CSDDD, which should be completed by the end of 2023. The EU directive will be transposed into national law by the end of 2025, meaning that the implementing legislation from 2026 graded according to company size enter into force.
CSDDD key points against ESG violations and greenwashing
Companies, subsidiaries and management will be required to identify, report and minimize or eliminate negative impacts of their business activities on the environment and human rights along the entire value chain. Large companies must develop a business strategy that complies with the Paris climate protection agreements and the EU member states are setting up supervisory authorities and a European network to issue regulations and Fines better coordinated. Injured parties can also civil law against responsible companies proceed.
Which companies will be affected?
Various models are currently being negotiated between the EU Commission, the EU Parliament and the European Council. The only thing that seems certain is that SMEs not directly affected and - if they are indirectly involved in a value chain - they should receive public support. Larger companies are divided into two groupswhere various criteria are under discussion: "large companies" & EU companies as well as companies from high-risk sectors & non-EU companies. The company indicators discussed for the application of the CSDDD currently range from at least 250 employees and a Minimum turnover of 40 million Euro up to 1,000 employees and a Net sales of 300 million euros. The results should be available by the beginning of 2024 at the latest.
The CSDDD as a sharper sword
The recent fines against DWS Group and Goldman Sachs for ESG violations and greenwashing show that the authorities take stricter action. The EU is planning to introduce the Corporate Sustainability Due Diligence Directive (CSDDD) to force companies to comply with environmental and human rights standards in their supply chains and to create a binding superstructure for existing guidelines. Large companies need to develop strategies nowin order to comply with the Paris climate protection agreements. Small companies will be less affected. This underlines the Increasing importance of sustainability and transparency in corporate governance.