GES Newsletter
Stockholm/London, September 22, 2015

On September 20, 2015, the US Environmental Protection Agency (EPA) and the California Air Resources Board (CARB) revealed that they detected manipulations that violate US environmental standards while testing diesel Volkswagen AG (Volkswagen) group cars. In particular, Volkswagen used illegal “defeat devices” to bypass standards. In some cases, the manipulations showed emission results in tests that were up to 40 times lower than actual emissions on the road. Volkswagen’s CEO Martin Winterkorn issued a statement in which he apologised on behalf of Volkswagen for “breaking the trust of customers and the public”. The EPA ordered the recall of nearly 500,000 cars in the US, and Volkswagen’s US CEO Martin Horn has committed to fixing the vehicles and ensuring no repetition. On Monday, Volkswagen shares fell 18.6 per cent, the third largest decline ever.

In addition, there have also been allegations that Volkswagen had not sufficiently cooperated with the EPA prior to these revelations. The German authorities have stated that they will start an urgent investigation to find out whether Volkswagen has manipulated German environmental tests as well. The environmental ministry of South Korea (where the company is a significant operator) will conduct its own tests on Volkswagen models sold in the country.

We believe that this issue may have future repercussions for entire EU automotive industry. The German government has announced plans to examine whether emissions data have been manipulated in German tests as well. Both the EPA and CARB have now begun procuring other manufacturers’ vehicles to test for similar devices. If the outcomes are similar to Volkswagen, this could have devastating consequences for the companies involved.

BMW and Daimler have indicated that these allegations do not apply to them and the fall in their share price has been contained.

The implications of the issue are potentially very damaging for Volkswagen.

The worst-case scenario would be that EPA accuses the company of having developed a deliberate strategy to mislead the agency and disregarded the possible effects on public health. Consequences would include colossal fines (the company has indicated today that it has set aside EUR 6.5 billion in reserves this quarter), ejection from a sustainability index, criminal charges, litigation as well as reputational damage to the Volkswagen brand.

Volkswagen has repeatedly come to GES’ attention due to allegations of convention violations related to corruption, workers’ rights, and human rights. At present, GES has one case at the evaluate stage (corruption) and three archived cases (corruption, workers’ rights, and human rights). This latest development points towards systemic issues related both to environmental standards and to corporate oversight and culture. In particular one may question whether a change at the helm of the company is not an appropriate development in the near future. More broadly, shareholders might also want to question the supervisory board’s accountability and their awareness of the issues.

We will review all aspects of the present case and decide on an action plan to actively engage with the company in the coming weeks.

The Volkswagen case is part of GES’ Extended Business Conduct Engagement service (which addresses OECD Guidelines) and the Stewardship and Risk service (which covers corporate governance services). Please do not hesitate to contact your client manager if you would like to receive information about these services.

For questions or additional information please contact:

Josiane Fanguinovény, Engagement Director