Wednesday, February 3, 2016

Lessons Learned from Volkswagen's Epic Greenwash

Volkswagen's emissions test deception has turned the world's second largest car brand into a liar, a cheat and a fraud. At issue is the falsification of nitrogen oxide and CO2 emissions data for 11 million VW cars globally including about 500,000 in the U.S. The automaker is guilty of emissions that were as much as 40 times above the official estimates. This translates into the concealment of about a million tonnes of air and climate pollution.

From design to manufacturing and recycling, Volkswagen was once considered to be a sustainability leader. Now the German automaker is a global disgrace.

Achievements and accolades

In addition to their sustainability initiatives Volkswagen has designed and built a number of hybrid, plug-in hybrid and electric vehicles. As part of their environmental program known as Think Blue, the company had reduced their use of energy and water. Right up until the scandal broke in September 2015, VW was making bold green claims. Among other things the automotive brand claimed it was on track to shrink its global footprint by 25 percent by 2018 compared to 2010 levels.

VV has been behind a number of green initiatives and earned sustainability accolades for their efforts. In 2010, VW was lauded for its greener cars including Green Car of the Year awards for their VW Golf Bluemotion and its now infamous Passat 1.6 TDI 105 Bluemotion. In 2013, they launched a number of efficient vehicles and they continued to improve their sustainability efforts including a showing of the most fuel efficient vehicle in the world.

VW's factory in Chattanooga, Tennessee is the only automotive plant in the world to have earned LEED platinum certification from the US Green Building Council (one of six LEED-certified facilities belonging to the Volkswagen group located in the US). The also installed 33,000 solar panels in a 66-acre solar park at the Chattanooga facility that generates 13.1GWh of electricity each year. In 2013 they were also ranked seventh by Interbrand's Best Global Green Brands Rankings.

In May 2014, VW won a World Environment Center Gold Medal Award for initiatives including their low CO2 fleet. Also in 2014, they received a Green Star Award for their Golf Sportwagen Hymotion at the LA Autoshow. 

How far the mighty have fallen. Now they find themselves in a crisis where they are trying to slow the slide of their brand and stem declining auto sales. In fairness, not everyone was convinced that Volkswagen's deep green convictions were sincere. Five years ago VW was criticized for being behind some of the dirtiest cars on the market.  A Greenpeace campaign derided the company for their strategy of producing vehicles that are more cost effective than they were fuel efficient.

Legal implications and economic costs

VW has admitted that 11 million cars are implicated in the scandal worldwide prompting the resignation of CEO Martin Winterkorn. The Volkswagen Group has already set aside around $7 billion to deal with the potential costs of the crisis. This may not be nearly enough as they could face fines of up to $19 billion in a criminal investigation in the US alone. To cover vehicle refits, regulatory fines and lawsuits the cost of the VW emissions scandal could conservatively reach $40 billion. Credit Suisse says VW’s total cost will be $87 billion.

Hundreds of lawsuits have already been launched against the automaker. There may also be charges levied against at least 30 company executives as well as legal action from customers and shareholders. Several law firms in the U.S. have already filed class action law suits against the car maker.

The Volkswagen Group is being sued by the US Department of Justice on behalf of the EPA for among other things, violation of the Clean Air Act.

As explained in an EPA blog post shortly after the scandal broke:
"We take this matter very seriously. It’s not only a violation of the Clean Air Act, it threatens public health and the credibility of the industry.”
"Car manufacturers that fail to properly certify their cars and that defeat emission control systems breach the public trust, endanger public health and disadvantage competitors," Assistant Attorney General John C. Cruden of the Justice Department’s Environment and Natural Resources Division said in a statement.

German, French and Italian police have raided Volkswagen offices. German public prosecutors launched a criminal investigation into the scandal and the French energy minister has indicated that France will be “extremely thorough, extremely severe” with VW. Late last year, U.S. senators began hearings to investigate VW for falsely certifying $50 million in U.S. tax breaks. In December, it was announced that the European Parliament will hold its own inquiry into VW's emissions fraud.

VW has been suspended from the London Stock Exchange’s FTSE4Good Index series and will be prevented from being considered for re-inclusion for at least 2 years.  By some estimates, in November VW car sales in the U.S. dropped by 25 percent. As reported by Fortune, VW sales in the US have fallen far short of other automakers. There appears to be no end to the free fall. VW car sales in Germany dropped almost 10 percent in January.

Volkswagen Group stock has plummeted, falling from $255 a share in March 2015 to around $100 a share early in February 2016. Declining stock prices have also impacted other automotive brands due to concerns that they will also be subject to greater scrutiny. The stock prices of European brands like Daimler, Renault, and BMW also fell. The stock price of American brands has also tumbled. General Motors stock has slid from around $40 a share in February 2015 to around $28 in February of this year.

Volkswagen knows how serious their legal problems are which is why they have hired the firm of Kirkland & Ellis, the same lawyers that defended BP after the Gulf of Mexico Deepwater Horizon oil spill in 2010. 

Far bigger than diesel engines

The problem is pervasive and extends well beyond the diesel engines in VW's fleet. The emissions scandal also includes gas powered cars in the VW Group (which includes Audi and Porche).  As reported by The Guardian, there are even allegations of the German government's complicity in the scandal suggesting the malfeasance may be widespread.

As reported by Triple Pundit, there are allegations that other car companies including Mercedes, BMW and Peugeot have vehicles that use as much as 50 percent more fuel than was stated in company-run lab tests. Many other vehicle brands may be be drawn into the scandal. According to Nick Molden, CEO of Emissions Analytics, the problem is pervasive. Comparing “real-world” fuel economy and emissions data with “official” numbers from major automakers reveals striking differences, Molden said.

Volkswagen's malfeasance shines a spotlight on how corporations cynically profit from efforts to combat climate change while contributing to the problem. The seriousness of this scandal will prove costly for all who are involved with sustainability and CSR. VW's deception has implications for sustainability reporting and CSR across the board. 

The entire automotive industry is impugned by VW's corporate arrogance and the shock-waves will reverberate throughout the private sector.  It is a particularly painful blow for companies that are earnestly trying to reduce their impacts.

Volkswagen will rebuild their brand and this may mean that they go the extra mile to ensure that they are both more sustainable and transparent. To illustrate the point, the car brand released its BUDD-e electric minivan at the 2016 CES. Despite VW's attempts at damage control these events will reverberate for years to come, and the repercussions will be felt far beyond the automotive industry.

Consumer trust

Customer perceptions have been harmed in ways that will not quickly or easily recover. Volkswagen's TDI Clean Diesel engine at the center of the current controversy may signal the death knell for diesel power. However, something even more pervasive has died along with VW's reputation. Consumer trust in corporate sustainability claims has also been savaged by the news.

This is not the first time that consumers feel betrayed by the automotive industry. Hyundai's claim to be the fuel efficiency leader a few years ago was revealed to be overstated as their MPG claims proved to be unattainable. 

In 2012, consumer's were already unsure about the veracity of corporate sustainability claims, after two successive automotive scandals, their cynicism appears to have been vindicated.

Good from the bad

Volkswagen and other car makers can be expected to step up their efforts in the wake of the scandal. According to EV Obsession, Volkswagen's investments in “alternative drive” technologies including electric vehicles will increase by around $145 million next year.

VW's fraud will surely shine a spotlight on automaker practices, pollution, emissions standards and testing. It may also auger a transition away from fossil fuel powered vehicles in general. To start with, oversight is required to bridge the massive gulf between auto company data and the real world performance.

As explained by Greenpeace:
"Volkswagen's emissions scandal has now cast an even brighter spotlight on the road transport sector and how governments and regulators need to ensure the industry cleans up its act."
We are almost certainly going to see more stringent independent assessments of vehicular emissions going forward. European rules will soon require strict testing regimes known as Real Driving Emissions (RDE) tests, as well as in laboratories. The EPA has also indicated that its automotive oversight will get even stronger. The EPA has already told the automotive industry that it will begin to look for potential defeat devices.

One of the brands that appears to be benefiting from the scandal is Tesla, the electric car manufacturer's sales rose more than 5 percent immediately after the news broke in September. After the news of the scam broke, Tesla automaker Elon Musk was among the first to call for random emissions testing when cars are on the road.

The sorry state of affairs may even prove to be an opportunity to transform national transport policies and increase the emphasis on emissions free vehicles.
"What Volkswagen is really showing is that we’ve reached the limit of what’s possible with diesel and gasoline," said Musk. "The time has come to move to a new generation of technology."
The VW emissions deception may have also have positive repercussions far removed from the auto industry. One such area is building efficiency. As reported by Business Green, like the auto sector, there is a huge performance gap between promised efficiency and actual performance. The article quotes Rob Pannell, managing director of nonprofit building industry advisory body Zero Carbon Hub, as saying the failure to address this gap could leave some property companies at risk of legal action.

Benefits of being authentically sustainable

As explained by Francisco Szekely, Director of the IMD Global Center for Sustainability leadership, the VW scandal brings into focus the real value of sustainability stakeholder engagement. This means more than promises to consumers, it means honesty and transparency.
"Manipulating sustainability performance data to achieve greater market share is not only highly unethical but it has a significant impact on the business performance of a company," Szekely said.
There is a financial incentive to responsible corporate conduct. Simply put, having the confidence of consumers and regulators contributes to better economic performance.

As explained by Dr Aileen Ionescu-Somers, the director of IMD's Global Center for Sustainability Leadership (CSL) Learning Platform, being authentic and true to your corporate purpose is a crucial key success factor.
"[C]ompanies simply cannot do business as usual on a failing planet with dwindling resources and rising social inequity," Somers said. 

As the German car maker strives to rebuild their tarnished brand, the story of their fall from grace serves as a cautionary tale for businesses everywhere. The pressure to produce less environmentally harmful products is onerous, but getting there through obfuscation is an unmitigated disaster.

The private sector is learning that it is not possible for a business to succeed in the long term if they fraudulently hide their harmful impacts. Transparency is indeed a double edged sword, but as we have learned from the VW fiasco, there is no other way forward.

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Mattie said...
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