Volkswagen Scandal Underlines Need for ESG Analysis

In September, German car manufacturer Volkswagen came under fire after admitting defective devices were installed on 11 million vehicles to cheat on emissions tests, leading to CEO Martin Winterkom’s resignation. Volkswagen’s alleged violation of the U.S. Clean Air Act raises a number of questions about the company’s product management practices. The company faces potential recall costs related to 482,000 vehicles, with up to 11 million vehicles possibly affected.

Beyond the attempt to deceive customers and regulators, the scandal also highlights the failure of traditional valuation models – such as discounted cash flow – to capture the full range of risks companies face today. It also underlines the potential benefits of assessing companies with alternative data sets that highlight environmental, social, and governance (ESG) signals, flagging risks that traditional analytical tools aren't designed to identify.

MSCI ESG Research’s team of more than 150 in-house ESG analysts rate over 6,000 listed companies on their ESG risk exposure and management performance and practices. MSCI ESG Ratings provide the basis for sector and company reports, thematic research, and MSCI’s family of more than 700 equity and fixed income ESG indexes.

ESG signals can be critical in identifying outliers – positive or negative. We noted a deterioration of VW’s corporate governance practices, while elevated warranty expenses were raising questions in MSCI ESG Research’s assessment of the company. In the May 2015 Index Review, VW was removed from the MSCI ACWI ESG Index.   

The scandal shines a light on the need for greater corporate transparency and acts as another argument in favor of integrating ESG factors into the investment decision-making process.

 

MSCI ESG Research: Volkswagen Rating

Between 2013 and 2015

MSCI ESG Impact Monitor, our global norms controversies and news monitor, flagged VW on controversies classified under the headings of product and service quality, bribery and fraud, and collective bargaining.

April 2015

VW’s overall governance score was in the bottom 28th percentile of companies covered by MSCI ESG Research globally. The governance score has been declining since last year.

May 2015

VW was dropped from the MSCI ACWI ESG Index.  VW was not included in MSCI’s Governance Quality Indexes launched in April.

August 2015

VW was upgraded to 'BBB' from 'BB‘ because of proactive steps to lower the environmental impact of its products - reducing its vehicle fleet carbon emissions and recall rates in recent years.

September 2015

Following the scandal, VW was further downgraded from BBB to CCC for MSCI ESG Ratings and from Yellow to Red Flag for MSCI ESG Impact Monitor.

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On September 30th, MSCI ESG Research downgraded Volkswagen from BBB to CCC. MSCI ESG Research is monitoring further development of the case.

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The Volkswagen (VW) scandal caught many investors off guard. The repercussions are likely to be felt across the automobile industry for many years to come affecting companies and investors alike.

MSCI ESG Research

MSCI ESG Research’s team of more than 150 in-house ESG analysts rate over 5,700 listed companies on their ESG risk exposure and management performance and practices. MSCI ESG Ratings provide the basis for sector and company reports, thematic research, and MSCI’s family of more than 700 equity and fixed income ESG indexes.