When policy is in the process of shifting from a broad principle-based concept to rules-based law it often becomes an open window of opportunity for criminality.

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In the words of Atilla the Hun, “The spirit of the law is greater than the letter.”  How organizations adhere to principals, puts the organization ahead of the compliance curve.  Ahead of rules there are movements and ideas, written laws follow closely thereafter.  

The principals of ESG are still being widely debated across the globe, the underlying principles of ESG are to do the right thing and elevate a consciousness of stakeholdership by organizations in the world in which they interact, naturally, such a broad mandate is going to be subject to rigorous debate, as creating policy around “impact” is subject to different approaches and interpretations. 

Many financial institutions now understand that many are excited for a new era of building in a world that takes into consideration capital impacts across the core tenants of ESG guidelines, as a result financial institutions have begun to help guide their clients to sustainable investments.  However, something that is not subject to interpretation, is fraud.

German law enforcement officials have stated after a daylight office raid that Deutsch Bank’s DWS Group has been misleading clients on Environmental Social and Governance ESG investments, going as far as to claiming that more than half of the asset management groups over €900 Billion assets under management were invested in sustainable investments. 

BaFin and BKA officials are signaling to institutions everywhere that while the guidelines being written around ESG are incomplete and ambiguous organizations not acting within the “spirit” of ESG principals will be subject to prosecution.  

This recent scandal is another black eye to the nascent and ambitious goal of shifting capital towards initiatives that support a vested interest in combating red investments that don’t meet ESG goals.  ESG’s ambiguity and disarray in translating from principal based to rule-based policy guidelines.

While evidence is still being collected as to how far the alleged fraud may have precipitated, Deutsch Bank and DWS are pleading ignorance and they likely have a strong defense because of the myriad of problems in unified ESG guidance for financial institutions or more accurately put, the lack thereof. 

All eyes will be on the DWS case, as German officials still must still prove that DWS committed prospectus fraud, a burden of proof that will ultimately rest on the state’s ability to define ESG, should the case prove successful under merit, the case may set new precedents for future cases as well as help forge rules-based laws across the EU and the world.

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The Path Ahead

While government agencies and regulatory bodies have been beginning the process of assembling task forces and publishing various memorandums of understanding to address the measures financial institutions need to take in moving their portfolios and investment initiatives to be compliance with ESG proposals there remains a massive void in providing substantive guidance as what constitutes ESG compliance. 

The evolution of ESG policy will likely inevitably become reliant on a core piece of legislation rather than solely left to the discretion of agencies.  ESG’s policy potential to become a new Dodd Frank is significant, the world will likely continue to operate in chaos without anchor policy direction being provided for agencies and regulators to continue to build off.  

Non-governmental organizations, advocacy groups, research firms, and regulatory management assistance vendors can play a pivotal role in shaping these policies. 

Governments contrary to popular belief prefer not to create policy in a vacuum, governments want to engage the public to develop policy towards solving common problems. How organizations petition and approach government through the next few years could be instrumental in shaping global ESG policy.

Recently the world’s richest man took to Twitter calling ESG an outright scam.  Policymakers, institutions, and major ratings agencies should take into consideration why an oil conglomerate constitutes a higher ESG score than the world’s largest electric vehicle manufacturer.

Non-governmental organizations that are defacto the private sector, are failing to police themselves accordingly, a situation that is becoming eerily reminiscent of the events leading up to the last financial crisis where ratings agencies were mis-rating high risk derivatives as safe.

While the arguably deficient ESG metrics may not lead to the widespread insolvency of financial institutions, if stakeholders are indeed serious about meeting global sustainability and ESG goals, this is something that is in dire need of structure and reform or further “misunderstandings” between financial institutions, corporations, and governments will persist.

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