Has the Deutsche Bank subsidiary DWS presented itself and its securities funds as greener and more sustainable than they are? On both sides of the Atlantic, several authorities have been investigating this allegation made by the former DWS sustainability chief for almost two years. It is still unclear how things will turn out. While the financial company has maintained its innocence, CEO Stefan Hoops has already admitted that DWS may have been a bit exuberant with marketing under his predecessor Asoka Wöhrman, who had to vacate his post a year ago.
Analysts from the environmental organization Greenpeace are now raising a new question, namely whether the board of directors of DWS could have personally benefited from the fact that the largest German fund company has suddenly been conspicuously brilliant in certain sustainability goals since 2020. Suddenly it had a particularly high volume of “sustainably managed” assets.
These questions are also important beyond DWS: the variable salaries of managers are increasingly linked to social goals and environmental protection measures, and not just to financial requirements as was previously the case. According to the consulting firm Willis Towers Watson, Germany is even a pioneer when it comes to such criteria: Among the DAX companies, 98 percent link the executive board salaries of the year to ESG criteria, i.e. whether company bosses also care about the environment (environmental), social issues and good corporate governance. In the leading US index S&P 500, only 69 percent of companies base their executive salaries on ESG criteria.
Nevertheless, many supervisory board members are still feeling their way: After all, the incentives should neither be too lax nor lead to greenwashing. In the case of DWS, the Greenpeace analysts come to the conclusion that the remuneration system has actually torpedoed and continues to torpedo even effective climate and sustainability goals. Their analysis is based on the business and compensation reports. When it comes to the weighting of sustainability goals in executive remuneration, there are many indications that ESG criteria have had a relevant influence on remuneration since 2020, especially for the CEO. “However, the design of the bonus-relevant sustainability goals is proving to be extremely problematic,” say the analysts. You even think it’s possible that DWS was able to achieve certain bonus-relevant sustainability goals simply by painting funds green, i.e. “re-labelling”.
For example, the increase in “ESG-specific” managed assets was an important indicator for the 2020 sustainability goals. That may have been an incentive for top management to increase the volume of ESG funds. In fact, the proportion of sustainable fund assets jumped from 2019 to 2020. From 2021 onwards, DWS would only consider inflows into funds that were already sustainable – an admission that the system was wrong?
Goals should be ambitious but achievable
A spokesman for DWS rejected the allegations. Various group targets and individual performance indicators are included in the remuneration, which are intended to ensure the long-term success of the company. This also included ESG targets. However, the absolute amount of sustainably managed assets is neither for 2020 nor now a “significant remuneration-related target figure for management”. In other words: even if you wanted to turn the numbers, it wouldn’t have been worth it for the board of directors. In fact, it is difficult to tell from the outside how heavily the ESG goals were weighted for individual success. According to Greenpeace, several indicators suggest this was relevant, which is denied in DWS circles. Responsible for the remuneration is and was the head of the supervisory board and Deutsche Bank board member Karl von Rohr, who did not want to comment on it.
Compensation experts definitely recommend relevant targets. “The non-financial goals should account for about 20 percent of the variable compensation,” says Regine Siepmann, compensation expert at the consulting firm HKP. Ideally, the bonuses in the area should be aligned with the long-term goals. They should also be important for the strategy, says Siepmann. The question of CO₂ emissions is of course much more important for an industrial company than for a service company. The goals should also be ambitious but still achievable. Otherwise, the board members would simply tick off specifications that are difficult to meet and possibly no longer bother with them.
Compensation at the level of large DAX companies
Also noticeable at DWS were the rather unambitious goals for the promotion of women in management positions for 2021 – also an indicator for remuneration. At the end of 2020, 27 percent of the first management level below the management of DWS were women. At the second level 28.2 percent. Nevertheless, DWS has only set itself the targets of 26 percent and 29 percent for these two levels for the end of 2021, thereby exceeding and almost achieving the targets at the beginning of the year. After all, by 2024, DWS wants to fill 32 percent of the positions with female managers at the first level and 33 percent at the second management level.
But the absolute amount of the boss’s remuneration at DWS also raises questions, and not just at Greenpeace. The voting rights advisor Glass Lewis, who advises institutional investors on voting at general meetings, had criticized them as “excessive” last year. The remuneration of both Wöhrmann (2021: 6.9 million euros) and Stefan Hoops (total remuneration probably 7.2 million euros) was and is therefore at the level of large Dax companies and also exceeds the average remuneration of bosses in the MDax or SDax by a multiple. “Taking into account the size of the company,” according to Greenpeace, “the DWS boss could even be by far Germany’s best-paid manager of a public company.” The proportionality and thus a basic principle of sustainable remuneration does not seem to exist.
And anyway: how can DWS be credible as an active investor if the fund company itself deviates from this in its own management board remuneration? As a trustee for fund investors, DWS also criticizes other companies at general meetings for poor management or excessive bonuses. A spokesman for DWS said that the remuneration was customary in the market and based on the payment at other large international fund companies. The remuneration report that DWS will publish this Friday will show how common the market was in 2022.