ESG whistleblowing, Desiree Fixler, Robert Eccles in conversation
I thought this conversation between Bob Eccles and Desiree Fixler insightful and important enough that I made a transcript of it.
I thought this conversation between Bob Eccles and Desiree Fixler insightful and important enough that I made a transcript of it.
I make it with no offered comment (I suppose usual disclosures and disclaimers1 apply) except one.
Desiree was placed in a position where she felt the right thing to do was at odds with other management. In this conversation, she dismisses the notion that she was “brave”.
She says:
“…There was no way I could sign off on what I had recognized to be absolute misstatements and misrepresentation…”
I feel fortunate that I have never been placed in such a position. In all honesty, I think many of us when faced with an actual situation like this may not be able to act like Desiree has acted - for many understandable pressures and reasons.
I was once told that if you stand for nothing, you fall for everything (usually misattributed to Alexander Hamilton)
I believe bravery and courage come in different forms. I think most people would agree bravery shows mental or moral strength in facing difficulty.
I will leave up to you to judge what you make of this situation. Take what insights you glean from this conversation between two people committed to their field.
Video and transcript below:
Robert Eccles and Desiree Fixler
Robert (00:02):
Everybody knows who you are and we'll get to that in a minute. But maybe just sort of as a baseline refresher course, could you give us the highlights of what the events were at DWS? What had happened, how it played out, and where you see things today?
Desiree (00:18):
Sure. It all started with so much hope. It was really a dream job to be a sustainability officer at a massive diversified asset manager that had an ambition to be a leader in ESG. I started the job and like many other asset managers there were some parts of the platform that was doing a decent job, a good job in ESG, and other parts that needed to catch up. So I got to work and first kind of just marked the whole platform to market and of course noticed that analytics wasn't so great. Then I stumbled upon the infamous Wirecard ESG report and Wirecard up through June, 2020.
That was around the same time the company filed for insolvency and also the CEO was arrested. DWS gave this company the second highest ESG rating on its proprietary ESG within its ESG database. It gave it the second highest ESG score based on great corporate governance and it highlighted the great business ethics of the company. That's when I knew we had a pretty big problem here because that's the basis of ESG. It is a firm...
Robert (02:03):
So this wasn't using one of the classic rating agencies. They were using data from wherever they were getting data from and they had their own proprietary ESG score. Is that what they were doing?
Desiree (02:16):
Yes, but it was based on a weighted average methodology of three external scores. So data providers such as MSCI sustainalytics, and there was a third. The proprietary software and system that DWS used wasn't just a straight average of those three scores. There was a weighted average methodology in play. But yes, it was solely based on three external scores.
Robert (02:53):
Okay. So please go ahead. They come up with this score Wirecard...
Desiree (02:57):
Wirecard has great business ethics. Literally, the dude is in jail in front of... The whole thing was absurd. For me, this is a huge issue because how are you supposed to structure products off of a flawed ESG ratings assessment system? This is the foundation for your ESG business. So for me, this was my starting point. This is where all of our energy went. We have to get to the root of this problem. I didn't know if it was a modeling problem, a human problem, a combination of two, and off I went. Unfortunately by large, most of the people I worked with were very focused and admitted the issues. We work together to come up with solutions.
Life isn't about just telling management problems. It's about offering the strategies and the solutions going forward. The story can be summarized that over an eight month period I reported directly to the CEO and I kept informing the CEO and the management board of the issues; namely a very flawed ESG system at play. Secondly, during this process I had been informed that the firm had vastly overstated its ESG integration assets under management.
Robert (04:46):
What was the percentage at the time? Do you remember what the percentage they were claiming was?
Desiree (04:49):
They were claiming that the majority of their assets under management-- Again, this goes back to 2019. They were claiming that 451 billion out of around surplus 750 billion was ESG integrated, meaning portfolio managers and equity analysts integrated ESG criteria throughout the investment process. That's not just like looking at an MSCI score. That is embedding ESG criteria and assessing ESG risk and opportunities throughout the investment process for an individual investment. And of course, minding that within the overall portfolio and that just wasn't the case. I can't give you and no one could give an accurate number on ESG assets under management because there's no tracking system. So for me, this was a situation where the issues just kept getting bigger and bigger. Especially coming from the US, I'm fin retrained. How could you report out on ESG assets under management? There's no tracking system.
Robert (06:12):
So they're claiming that the portfolio managers are doing ESG integration which is different from impact. Maybe we'll get to that later. But there was no way for senior manager to know whether this ESG integration was really taking place in the decisions of the portfolio managers or not. Do I understand that correctly?
Desiree (06:30):
That's correct.
Robert (06:32):
It's astonishing to me. And you're making claims that more than half of your assets have ESG integration and you don't really know.
Desiree (06:41):
Well, absolutely. And this is coming at a time because now this is 2020. If you recall SFDR; the Sustainable Finance Disclosure requirement regulation kicks in, in March 2021. In the year 2020 everyone's running around getting prepared for the onset of this regulation. So you have to define what is article six, what is article eight, and what is article nine. So these determinations are being done. For me, I'm saying not only do we have just ethical requirements and disclosure requirements to tell the absolute truth, but we have SFDR here and this version of ESG integration will not qualify as article six. It's never going to happen. Just because you're taking in feeds from an MSCR sustainalytics, that is not the same thing as risk managing investments in a portfolio according to ESG criteria.
Robert (07:57):
So six or eight?
Desiree (08:00):
Six.
Robert (08:01):
Even six?
Desiree (08:02):
Yeah. Right. It's not. The argument internally was, "Well, that can sort of qualify as article six or ESG integration because portfolio managers have access to data. They have access to an MSCI or a sustainalytics feed." And of course my argument is that, "No, article six [lor ESG integration the way DWS defines it, is use of that data. It's not just the availability of data." It's that portfolio managers. You're telling your investors that this particular strategy has enhanced risk management because it considers ESG criteria. So therefore the portfolio managers have to actually be using it, have to integrate it. This is an active version.
Robert (08:57):
Actually, I have a gym membership. I never go to the gym but I have a gym membership.
Desiree (09:02):
It's wild. This went a few rounds and then it was coming to a time where we were about to publish the annual report. So this is now the beginning of 2021 and this was going to be a combined annual report; both financial disclosures and non-financial disclosures. I was an editor on everything that related to sustainability and ESG. So of course, I took the red pen. I redlined the misstatements in this report and just said, "There's just no way that we can report out these. The majority of the AUM goes through ESG integration. We first of all don't have a tracking system. There's no monitoring system. Secondly, we know through our own research that only a very small fraction of the portfolio is in any way ESG compliant."
I dug my heels in. A lot of people say, "Oh, wow. You were so brave at what you did." Truthfully, anyone that has gone through regulatory training or as a sustainability officer... ESG there's a G in it, right. We had risk reports. We had senior leaders at the firm agreeing with me. There was no way I could sign off on what I had recognized to be absolute misstatements and misrepresentation of the firm's ESG AUM and also crucially the firm's ESG capabilities. There were misstatements exaggerating the profile of the company. We were not a leader in ESG. We did not have sophisticated above average ESG systems and risk management framework. It was definitely at best a work in progress. So I redlined that and reported it to the board and the rest is history.
Robert (11:16):
Well, I guess they could have said, "Ms. Fixler, thank you very much for calling this to our attention. This is really important. We want to make sure we got it right." They clearly didn't do it. So colloquially, it looks like they kind of threw you under the bus. Did they just tell you to go away? What happened?
Desiree (11:32):
It was very strange what happened. I was two weeks after my more adamant and more aggressive report out to management that we have problems coming to head with the annual report. We need fix these things. You've made public statements and we're not delivering on them. I need answers here and I also need resources. We have to get to work here. Two weeks after that the CEO took me into his office and more or less just shouted at me. He didn't fire me, but the writing was on the wall. It wasn't a coherent conversation so I didn't know where I stood.
I was on a planned trip to New York when the CEO hired an external lawyer who informed me that they had issued my termination. I was not given a reason. They just said I can do it because I was within some sort of probation period. Interestingly, the workers' council-- It's a very German concept but it's there to protect employees, said I was outside probation and that was it. There was apparently this letter at home in Frankfurt in my mailbox and they wouldn't send anything electronically. HR wouldn't speak to me and that was that. That was the last communication.
Robert (13:07):
And as I recall we talked about this. You appeared before a German court to try and get your case heard. How did that go? How did that judge treat you?
Desiree (13:15):
I think the best word for that one is farcical. This we challenged on the basis that this was a retaliation termination that I was fired. I was fired because I had internally raised the issues on what I had seen as ESG washing up the firm. Unfortunately, the judge just walked in on the day and said, “I was within probation. This is a rightful termination. There's absolutely no basis to my allegations of ESG washing or greenwashing. No misconduct has been found at Deutsche Bank DWS” and that was it. Case dismissed. There was no testimony. There were no witnesses called.
Robert (14:10):
Were you even allowed to talk?
Desiree (14:19):
No.
Robert (14:19):
Is it unfair for me to conclude that basically the German establishment, financial establishment, political establishment, judicial establishment, circled the wagons wanted you to go away? So let's fast forward to a week or so ago. Mr. Wohrmann resigns after 50 German police get a search warrant or something to go on raid and get information. So it would seem to me that you have been vindicated big time. All of this stonewalling by DWS and by the German courts often looks like it was kind of asleep at the wheel for a long time, which is my personal opinion. So finally it catches up with them, right. And we'll kind of see how this plays out. So let me ask you a different question.
Desiree (15:04):
One other thing to point out is that DWS actually also recently came out in their annual report for 2021. It was published in March, 2022. They also self-reported that they have gotten rid of this very flawed ESG risk assessment system called smart integration which was neither smart nor was it ESG integration. And secondly, they revised down their ESG AUM by 75%. So the firm also self-reported out and admitted. Again, actually did the two main things I asked them to do a previous year before. So that was also a bit of vindication.
Robert (15:54):
Well, sure version is you were right and they were wrong. Some of the investments that they made they wrote off, but that's another entertaining story. A lot of people have wanted you to come talk to them since then, right?
Desiree (16:12):
Yes.
Robert (16:13):
So DWS may be particularly dramatic case and particularly incompetent in terms of what they were doing. But what's your sense from you knowing the industry well? You've talked a lot of people. It's under a lot of threat now. Mike Pence wrote the stupid editorial letter to the Wall Street journal which he read. It’s like now ESG went from nothing to like abortion rights and gun control for the crazy right in the United States. Where do you see all this standing in the industry today? Are the claims being made valid claims? Are the regulators stepping in? Should we just drop this term ESG investing and get back to basics? What's the state of play in your mind in general?
Desiree (16:54):
I'm actually optimistic. I think that the recent regulatory actions and enforcement actions in the US and in Germany is the game changer here. This is what it really takes even more than SFDR to clean up this market. So I think this is the wakeup call for every ESG practitioner to substantiate their ESG claims that ESG statements and products have to be backed by substance, they have to be backed by action, and most crucially data. And I think that this is what's needed to shake out a lot of the ‘BS’ if you will, in this market. To your point, it’s felt that before these regulatory and enforcement actions that ESG has been whittled down and diluted to mean everything and to mean almost nothing. I really felt at times that there are some really good, devoted, and incredible players in this market, but have been taken over by the bureaucrats and just been used as a marketing tool.
Robert (18:18):
The bureaucrats in the marketing teams. But there are so many funds, Desiree. The SEC fund, BNY Mellon, that's good. 1.5 million which is not a lot of money to BNY Mellon to be honest. How do regulators keep track of all of these claims? These prospectus are long. There's a lot of legal mumbo jumbo. ESG integration isn't well defined. Some pushback on what the SEC has come out with saying, “You haven't defined it so how do you expect us to know what the rules are to adhere to it.” How do the regulators get their arms around it? What is the role of the rating agencies? Everybody's beating up on them but they're basically proxies because companies don't have very good reporting on this stuff. What does regulation need to do to solve a problem when there's still a lack of clarity about the concepts and there are so many funds?
Desiree (19:05):
I think it's going to be like that top down, bottom up approach, macro micro. Meaning, one of the best and most effective ways to keep bankers or Wall Street practitioners honest is through enforcement actions. I think that DWS-- and remember, it wasn't the working level people, but management; the CEO and its board and the chairman.
Robert (19:35):
Since we're back on DWS, did this go up to the Deutsche Bank level?
Desiree (19:38):
Yes it did. Absolutely.
Robert (19:38):
They're all conclusive in this as well?
Desiree (19:42):
Absolutely. All involved. The president of Deutsche Bank is the chairman of the supervisory board at DWS. So I think this. That had this crackdown and today's skepticism and cynicism been around two years ago, DWS would never have greenwashed. It would never have happened. I believe that the CEO would've thought twice about doing what he was doing. With the crackdown I think that's where folks have now understood you can't just say it. You're going to have to back it up today. And with that top level mindset-- It's exactly what we experienced during the great financial crisis and all the regulation that came in. A paranoia set in on Wall Street. That's just on the financial side. That's what people have woken up to today. We have to be just as accurate on non-financial disclosure as we are in financial disclosure. That ESG isn't just this warm, fuzzy thing. It's a driver for a big chunk of your business. This is adding a tremendous amount to top line and bottom line and you have to back it all up with real data points.
So I think that's one way. Again, just for the financial markets to understand that greenwashing if material can be considered securities fraud. That's how you kind of nip it in the bud up on top. Then I think it's all the great initiatives that I know you're part of like ISSB and the SEC proposed climate risk disclosure initiatives. I think that's where we have greater definition on ESG terminology. We have actual standardized reporting requirements. I think that this is the way forward. This is how you can get a handle and really try and deter greenwashing and at least mitigate the misrepresentation and miss-selling to investors.
Robert (22:00):
You're pretty optimistic. There's a wakeup call. It's not like you have to sort of scan every fund. You kind of get a few of the bad apples and then other people kind of read the tea leaves and say, "We have to do better.” But let me shift the conversation a little bit because to be perfectly honest with you, Desiree, I don't care much what happens to DWS. I don't care much what happens to Deutsche Bank. It's interesting to me. I wrote about this in a little piece. Here's Germany, the fourth largest country in the world by GDP, its flagship bank; Deutsche Bank. Last time I looked it's the 72nd largest bank in the world by market cap. Draw your own conclusions from that. I do care about you. So we've had this conversation like how are you doing?
To be honest, it has been interesting and appalling to me just speaking for myself that you've done what I think is a very brave thing. You're saying it was just kind of what any person that was trained and kind of had the right sense of what to do. Everybody wants to talk to you. Often they don't want to pay you. It's just, "Desiree, could you please come and inform us." Why aren't a lot of these big financial institutions that realize the incredibly important role that you play-- To be blunt, why aren't they offering you jobs? To be honest, I just don't get it and it's appalling to me.
Desiree (23:26):
I guess it has to come from the whistle blower nomenclature. That's the weird thing. Technically, I complained internally and then I complained to the mothership; to Deutsche Bank.
Robert (23:45):
You went through all the steps. Every step along the way you tried to kind of play by the corporate rules and they still threw you under the bus. You were proven right. Asoka Wohrmann is gone. 50 police finally went in there in a raid.
Desiree (24:02):
The market is kind of bifurcated on me. There are those that do invite me to speak and do pay me for advisory work. Then there's a big chunk of the market that is nice and will reach out. I guess they're afraid that I'm going to tattletale and call in the SEC or call in the federal. We live in a very litigious society and I guess folks are afraid that in every issue I'm going to call in the regulators and that is not the story at all. This was a story that I was very accepting. My eyes were opened when I walked into DWS Deutsche Bank. They were under investigation for ignoring suspicious activity reports on Jeff…
Robert (25:06):
Deutsche Bank always seems to be under investigation for something. There's something about the DNA of that place. They always seem to be in trouble over something. I don't understand it.
Desiree (25:15):
I believe that I was being brought in as the reformer. Unfortunately, that didn't happen. The other point to make is that the company went to the press first. The story was not that I just ran to the regulators and told them or ran to the Wall Street journal. They tried to crush me in the market by writing a disparaging CEO, this disparaging internal memo, and then literally same day handed it to Bloomberg and Bloomberg published a story on me. So yes, I responded through...
Robert (25:48):
You had no choice.
Desiree (25:55):
Absolutely. It was to clear my name. But also what got me was the firm had the nerve to ratchet up all the ESG propaganda on how wonderful they are. I'm watching this that inflows at the firm. 40% of their inflows are going into what I consider unreputable ESG strategies. I'm watching this and saying, "This has to stop. I need to make a statement because there's this green bubble brewing here and truthfully, I don't think DWS was the only one doing it.” So that also drove me to go to the Wall Street journal and just with full disclosure speak my mind. I'm a big believer in sustainable investment. But what the market was doing up until today was mobilizing trillions of dollars into at best do no harm portfolios.
I believe that investors were being miss-sold. They were thinking their money was going to work through climate action strategies or they were addressing inequality in the world. Meanwhile, the money was just going into Apple, Microsoft; great companies. But that's not addressing the sustainable development goals. That's not climate action. I also wanted to leave my mark on this. That was my job as a sustainability officer. We need to get back on track. We have urgent issues and this money needs to be rightfully channeled into more impactful strategies.
Robert (27:40):
So we have just a few more minutes. Let me ask you kind of a last question for us to kick around a little bit. We've had this conversation some time before. If you could pick the ideal job you'd like to have-- and maybe there are different types-- and we could wave a magic wand and get you a job at a large financial institution; whether it's a bank or an asset manager where you feel like you could make an important contribution, you could sort of help continue to lead this movement, provide some more clarity, provide some more discipline, what kind of a role would you like to have and what kind of a place?
Desiree (28:17):
What's most important is cultural alignment. Working with folks that really want to make progress and impact and achieve these net zero goals. So I would've said like up until a few months ago probably I'd love to be another chief sustainability officer. Maybe that has changed. Maybe it's best for me to stay as an advisor and just not be one tracked. Maybe it's working with regulators, standard setters. Maybe that's where I'm best positioned. Just to work with others that really want to make systemic change. Maybe that's where I'm best. I would look at all options but I'm not just going to be one tracked and just think that I have to get another corporate job. There are so many ways to make an impact here and I think there's fabulous work done by nonprofits activism. Climate activism, working for an activist fund, and likewise just advising. Just to raise the bar and practice in the market.
Robert (29:38):
I think you have a lot of ways you can contribute and we're going to continue to chat about this. I'm going to continue to help you to the extent that I can. I am sad that you're moving a week from today from New York to London. I live in Boston as you know, and I fly in the day after you leave so I won't be able to see you in New York where we could have another lovely dinner at these fabulous little French restaurants that you know about. But I will be as you know, let's put in a little plug for the Oxford sustainable finance summit that will both be out in July 2021. I hope it's okay if I plug an Oxford summit. So I look forward to seeing you there.
Then let's get together in London and just catch up time of our own. In the meantime, thank you for everything you've done. I think there are a lot of lessons to be learned from the DWS story. I'm sure you're right. It's not the only one. You have been vindicated. I'm frustrated it took as long as it did to happen. But you have been vindicated and I'm sure you're going to continue as I said to make an important contribution. I'll miss you in New York, but I will see you in Oxford next month.
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