An I.R. Perspective on the Volkswagen Scandal

Posted by on October 6th, 2015

The recent revelation that Germany’s largest automaker, Volkswagen, installed ‘defeat devices’ to cheat on emissions tests has spooked investors, wiping billions off the company’s market cap and reminding the rest of us that environmental, social, and governance (ESG) procedures have an unavoidable, and increasingly significant, impact on shareholder value that is to be ignored at your peril.

As a result of this scandal, Volkswagen is now facing fines of $18bn plus vehicle recalls, declining sales and legal fees. But what is the broader significance of this event? What does the market reaction teach us about investor behavior? And what does it mean for the role of ESG in a company’s investor relations program?

Well, for starters, the ensuing speculation that other automakers may also be guilty of the same practice, or that the repercussions may be felt beyond Volkswagen, demonstrates the fragility of investor confidence and how easily our hard-won ‘shareholder trust’ can be shattered. The markets seemed to sell European automakers on the contagion risk, with Renault and Peugeot both losing close to 15% of their value at the time of writing.

More interesting still is when we look at this in the context of the overall German economy, where the automotive sector is 17% of exports and 1 in 7 jobs are directly or indirectly tied to the sector. With Germany’s heavy reliance on exports and global economic pressures weighing on the country, it is no wonder that investors are jittery about failings at what is supposed to be one of the country’s most reputable automakers. In a volatile market, any reputational risk – whether real or perceived – is not going to cut it for many investors or regulators. In response to this scandal, authorities in France and Italy have both called for further investigations and the U.S. Environmental Protection Agency (EPA) has opened investigations into other leading car manufacturers.

However, it is not just multi-billion dollar companies that are under scrutiny. Small-cap companies need to be aware of their own ESG issues and trends in their sector if they are to successfully interact with Wall Street. Many mainstream investors are adopting ESG and “socially responsible investing” strategies into their investment process and ESG/SRI metrics are increasingly used as both a risk management tool and a potential factor in value creation. Indeed, global sustainable investing assets grew a notable 61% from 2012 to 2014, reaching $21.4 trillion and 30.2% of the professionally managed assets. In the U.S., the effect is even more pronounced, with investments in SRI assets growing 76% from $3.74 trillion in 2012 to $6.57 trillion in 2014.[1]

Here at KCSA, we represent small- and micro-cap companies across a diverse range of sectors and we are all too aware that a company can be denied access to much-needed capital if its sector becomes unfashionable (take, for example, the mass collapse of uranium mining companies after the Fukushima disaster). Our job is to help our clients effectively convey their investment potential and corporate vision to existing and potential shareholders; this includes knowing when and how to incorporate ESG strategy into general investor communication. That way, our clients can be confident that their shareholder relations are strong, so that a car emissions scandal – or something of its kind – needn’t put the brakes on their growth.

[1] Global Sustainable Investment Alliance (GSIA), “2014 Global Sustainable Investment Review,”