News from Pohlmann & Company


ESG Reporting and Greenwashing as Compliance Risk

Increase in multinational ESG Reporting Requirements and Standards

Environment, social and governance (ESG) remains a key issue for global companies. Investors’ expectations and pressure to succeed are increasing. International investors with global investment portfolios are demanding high-quality, transparent, reliable and comparable reporting from companies on climate and other ESG issues. At the same time, however, companies are confronted with increasingly far-reaching and diverse ESG regulations:

  • In the EU, disclosure requirements have already been introduced for companies with regard to their sustainability activities (EU Taxonomy Regulation, EU Sustainable Finance Disclosure Regulation (SFDR)).
  • Even though BaFin has temporarily suspended the finalization of its planned guideline for sustainable investment funds, citing the current uncertainties in the regulatory, energy and geopolitical environment, the principles set out in the draft guideline for consultation are nevertheless to continue to be applied in the context of the approval of sustainable funds.
  • The EU Commission is currently discussing the reporting standards to be introduced with the planned Corporate Sustainability Reporting Directive (CSRD). According to the CSRD draft, companies subject to reporting requirements will no longer be able to choose where they publish their sustainability information. Instead, the required information is to be included in the management report of the annual report and is to be subject to an external audit.
  • In parallel with the European developments, the IFRS Foundation has announced the establishment of an International Sustainability Standards Board (ISSB). The aim of the ISSB is to deliver a comprehensive global baseline for sustainability-related disclosure standards that provide investors and other capital market participants with information about companies’ sustainability-related risks and opportunities to help them can make informed decisions.
  • In March, the U.S. Securities and Exchange Commission (SEC) announced it would crack down on embellished ESG representations in investment products and, in this regard, released a proposed Rules on Climate-Related Disclosures to improve and standardize investors’ climate-related disclosures. The U.S. Department of Justice (DOJ) also recently announced that it will make enforcement of environmental laws a top priority, making the Environmental Justice Division the largest and most powerful in the country.

Danger of greenwashing

With increasing transparency requirements, companies must ensure the accuracy and completeness of the information they publish in their reporting so as not to be exposed to the accusation and increasing liability risk of “greenwashing“. Such accusations can not only cause immense damage to a company’s reputation, but can also have far-reaching legal consequences, particularly at a global level, as the current example of DWS impressively demonstrates:

On May 31, 2022, 50 officers from the public prosecutor’s office, the German financial supervisory authority BaFin and the German Federal Criminal Police Office searched the premises of Deutsche Bank’s headquarters and the neighboring building of DWS on suspicion of investment fraud. The investigations against Deutsche Bank subsidiary DWS in Germany have been ongoing since January 2022, prompted by allegations of “greenwashing” in disclosures about environmental protection and sustainability aspects of investments that have been going on for months. Contrary to what was stated in the sales prospectuses of DWS funds, ESG factors were only actually taken into account in a minority of investments. The SEC has been investigating DWS since last year on suspicion of fraudulent labelling of “green” investments. The accusations were not without consequences for the parent company. Deutsche Bank AG’s failure to disclose the whistleblower allegations against its subsidiary regarding greenwashing at DWS to the DoJ was considered by the DOJ to be a violation of the terms of the ongoing Deferred Prosecution Agreement (DPA) – Deutsche Bank then agreed to extend the DPA, including the associated compliance monitoring, until February 2023.

Based on these developments, companies must take a comprehensive look at their sustainability reporting. The new regulations require detailed disclosure. If reports prove to be incorrect or incomplete in retrospect, there is a threat of severe sanctions, not only in Germany and the EU, but possibly also on the other side of the Atlantic. In this context, business managers must ask themselves in particular how they can ensure the accuracy and completeness of their sustainability reporting. Access to valid information and data that accurately and comprehensively reflect the status of sustainability activities in the company is an essential prerequisite for adequate quality of sustainability reporting.

Sustainability recommendations in the new DCGK

With the new German Corporate Governance Code (DCGK 2022), the issue of sustainability is now also firmly anchored in the management of listed companies. Here, the management board and supervisory board are confronted with new organizational and due diligence obligations, non-compliance with which can trigger personal liability.

For example, in the future the Board of Management is to systematically identify and assess the risks and opportunities associated with social and environmental factors as well as the ecological and social impacts of the company’s activities. Ecological and social objectives are to be given appropriate consideration in the corporate strategy. While listed companies have been obliged to set up an RMS and ICS since the Financial Market Integrity Strengthening Act (Finanzmarktintegritätsstärkungsgesetz – FISG) came into force, the DCGK 2022 now fortunately clarifies not only that this also includes a CMS geared to the risk situation, but also that risks relating to sustainability-related objectives are to be covered. In implementing these requirements, management will often be faced with the challenge of having to overcome established information silos and ensure the integration of relevant data into reporting systems with internal controls. In the future, reporting-relevant sustainability information and data must have the same level of robustness and documentability as financial information.

For the supervisory board, the new DCGK 2022 also clarifies that its monitoring and advisory duties also include sustainability issues and that the audit committee must have appropriate expertise with regard to sustainability reporting. Supervisory boards are therefore also called upon to pay particular attention to the functionality and coordination of GRC systems and processes (ICS, RMS and CMS) with regard to the sustainability-related goals and risks of the company.


In the medium term, greenwashing and the associated liability risks for companies and their owners can only be prevented by establishing clear governance structures and compliance requirements that also take ESG/sustainability aspects into account. Business leaders must clearly align their GRC systems and the functions responsible within them to ESG/sustainability issues and risks as well. Even though clear responsibilities need to be defined, ESG and sustainability issues require more than ever continuous communication and coordination among all gatekeeper functions.

In this context, corporate bodies should also not underestimate the cultural aspect: With the continuous increase in complex regulations and unprecedented public interest in corporate sustainability, the manifestation of an ethical corporate culture and management is becoming more important than ever. When the question “Is this allowed?” becomes increasingly difficult to answer, the moral compass of every employee and decision-maker is required. Consolidating this and living it out authentically can no longer be missing from the list of risk avoidance strategies and mitigation measures of a company dealing with ESG and sustainability issues.

If you have any questions regarding ESG/sustainability regulation, the review, design and further development of your GRC systems or (German/international) prosecution for possible greenwashing, we are always available for a discussion.

We have many years of experience in developing and implementing effective and sustainable GRC structures and systems, including as (voluntary or regulatory) compliance monitors. Our expertise in advising on (international) environmental and other regulatory issues is equally pronounced. We would be happy to discuss our experience with you – including what the SEC, DOJ and German law enforcement and government agencies expect from companies.