Police officers arrive for a raid of Deutsche Bank’s offices in Frankfurt last month
Police officers arrive for a raid of Deutsche Bank’s offices in Frankfurt last month © Alex Kraus/Bloomberg

Chief executives have many responsibilities, but one of the most valuable is persuading investors and others that their companies are performing well financially and doing good for the world. If cracks appear in these stories, trouble follows.

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

The asset manager now stands accused of “greenwashing” by exaggerating the ESG credentials of its investment funds and its offices in Frankfurt were raided this week by German police on suspicion of prospectus fraud. Wöhrmann then resigned.

He denies wrongdoing, and proclaimed earlier this year that DWS’s push into ESG investment was “a true success story.” But the raid will send shivers down the spines of quite a few CEOs who routinely trumpet how seriously they take climate change and how their companies lead the way on social responsibility. Some will need to weigh their words more carefully.

Shutting up is not an option. Creating a narrative was once a secondary matter for CEOs, who focused mainly on operational matters away from the public gaze. But as investor and media scrutiny intensifies and companies have to communicate constantly to shareholders, customers and employees, the CEO has become the chief storyteller.

Anne Mulcahy, former chief executive of Xerox, once reflected that a unifying corporate story “creates a powerful momentum — people’s sense that they are able to do good things” and mattered more than “the precision or elegance of the strategy.” A stirring narrative beats a PowerPoint presentation every time, even in companies where it reflects the underlying reality.

A tale of ethical endeavour triumphed for a while at WeWork, the office-sharing company formerly run by the guru-like Adam Neumann, portrayed in the Apple TV drama WeCrashed. “Our mission is to elevate the world’s consciousness,” it declared in its filing for an initial public offering in 2019; its value then plunged as investors examined the financial fine print.

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

Indeed, the more extravagant the talk, the more likely it is that something is going wrong. Another study found that CEOs of companies that had manipulated their accounts were prone to using words that conveyed extreme positive emotion, such as “awesome”, “cracking”, “fabulous” and “immense” on investor conference calls.

The rise of corporate social responsibility, with $2.7tn estimated to have been invested in ESG assets, is a terrible temptation for self-aggrandising CEOs. Meeting financial targets consistently is tedious, but promising to improve the world sounds heroic.

It goes down well with investors and appeals to employees who want to believe they work for an ethical outfit. Everyone gets a warm feeling from being told they are on a higher path.

A further attraction is that greenwashing is hard to pin down. Financial metrics can be manipulated, and companies often adopt their own — WeWork was known for inventive accounting — but a company’s cash is ultimately traceable (or not, in the case of Wirecard’s missing €1.9bn).

ESG investment is much tougher to measure: although many ratings providers now try to do so, approaches vary. As Gary Gensler, chair of the US Securities and Exchange Commission, put it last year, there is “a huge range of what asset managers might mean by certain terms, or what criteria they use”.

DWS flourished amid ambiguity, promising to be “ambitious, innovative and unconstrained in our forward thinking”. Then Desiree Fixler, former group sustainability officer, accused it of misrepresenting its ESG capabilities. “We do risk management, and we do it badly,” another executive wrote in an internal email.

The company has yet to be charged with any crime, 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 $1.5mn for omitting ESG fund information, and proposed new rules.

It also has wider dangers. Most frauds only worry those who are directly affected, but false claims to being ethical annoy everyone. Volkswagen paid €32bn in fines, legal fees and customer compensation after it was found in 2015 to be concealing diesel emissions.

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

john.gapper@ft.com

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