Is Volkswagen the Lance Armstrong of the Car Industry?

When the business case for sustainability provokes unsustainable behavior
Is Volkswagen the Lance Armstrong of the Car Industry? Is Volkswagen the Lance Armstrong of the Car Industry?
Publ. date 30 Sep 2015
The revelations of Volkswagen manipulating emissions tests show how fibbing with one’s impact on society can lead to big legal and reputational consequences. Apparently, the German automaker deemed the upside of selling large numbers of cars more attractive than the risk of getting caught with fraudulent software. The story brings back memories of Lance Armstrong’s Tour de France victories – titles that were pulled back after he was caught using doping. What lessons can be learned from the Volkswagen debacle?

The business case for sustainability apparently was too big

Volkswagen’s objective is to become the world’s number one car company in terms of sales as well as becoming the world’s most sustainable automotive company by 2018. Building green cars that sell well therefore is a prerequisite for which the clean diesel strategy was a welcome solution. In reality, it seems that within the company, meeting both ambitions must have been perceived as unrealistic. Instead of re-evaluating the goals and/or accelerating innovation, the solution was to cheat the system. This illustrates that the commercial benefit was big enough for VW to accept the risk of getting caught multiplied by the impact of being caught. That this was massively underestimated,  is clear for all with an evaporated stock market value of €27 billion.

Treating non-financials with the same rigorous assurance as financial data

In order to become the world’s most sustainable automotive company, Volkswagen identified a number of key action areas in terms of economy, people and environment. Most notable is the aspect of compliance, risk management and corporate governance. The company has been firmly criticized over its unusual governance structure and independent controlling systems have proved to be insufficiently capable of flagging this measure.

With the amount of Bloomberg ESG-data customers growing 76% in 2014, it is evident that  investors are increasingly putting an emphasis on using ESG-data in order to assess a company’s value. Therefore non-financial business conduct requires a strict governance structure and the materiality matrix merits a mature controlling environment that challenges corporate departments and is able to escalate to higher levels in case of serious irregularities.

Driven by reporting standards such as GRI G4, SASB and IIRC, sustainability has matured. Having a clear overview of the material issues is mandatory to address the most relevant topics both from a risk mitigation and commercial perspective.



 

From champion to cheat in a matter of days

Less than three weeks after the publication of the 2015 results, RobecoSAM announced that Volkswagen will be removed from the Dow Jones Sustainability Indices (DJSI). As a result, VW will no longer be identified as an Industry Group Leader in the “Automobiles & Components” industry group. This is not a precedent: also Toshiba Corporation and Petrobras were delisted in the past twelve months due to their involvement in fraud issues. Deletion from the index not only means loss of face, but also an exclusion from investment portfolios.

The fact that VW was named as one of the industry group leaders in 2015 DJSI results a couple of days before Dieselgate happened, was an unfortunate collision of circumstances.  The DJSI composer, RobecoSAM, emphasizes that reliability checks on the data collected are in place by requiring third-party verification, assurance of environmental and social reporting, and adherence to global quality standards such as ISO. Companies are externally monitored throughout the year in terms of media coverage, stakeholder commentaries and other publicly available sources to pick up issues that the company itself may not have reported on.

On their scale of operation, ESG rating agencies cannot collect urine samples from each participating company, but the need for a high quality and detailed research process is once again proven.

Public disgrace, but what happens next? Was this the tip of the iceberg?

In the example of Lance Armstrong, his stripped wins were not allocated to other cyclists, mainly because increasingly evidence emerged that the entire sport had been contaminated. Hopefully this is not the case with the automotive contenders in the Dow Jones Sustainability Index.  Should a new champion be crowned? In the past, runner up BMW Group has already been Dow Jones Sustainability Index Leader for 8 consecutive years.  So does BMW Group deserve the title of Industry leader?

Please share your thoughts with us on LinkedIn.

Image source: Sebastian David Tingkær, Flickr

About Nikkie Vinke

Multidisciplinary advisor in ESG benchmarking, sustainability strategy development and execution. | nikkie@finchandbeak.com

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