The road ahead; the road behind

Volkswagen AG has embarked upon a challenging process of change as it seeks to reposition itself for an era of sustainable mobility and a zero-carbon transport system.

• Part of this transition process requires the company to articulate (to investors and others) how its intellectual capital, production assets and management and marketing processes enable it to compete and lead in this new market.
• Part of the transition requires the company to demonstrate (to investors and others) that it has managed and moved on from previous controversies.

From a sustainable investor perspective, controversies feature prominently in ratings reports published by ESG ratings and can impact ratings themselves. Notably, Volkswagen AG was downgraded and excluded from various ESG indices on the back of the Dieselgate scandal of 2015.

In this case study, we document the novel approach that a team of investor relations and sustainability experts from Volkswagen AG adopted to dealing with 'ESG controversies'.

Step 1: Analyse external perceptions

In 2020, the team analysed the company profiles that ESG ratings agencies published about them with the aim of better understanding what was influencing its ratings - specifically, to understand the deficits and areas for improvement. The company noted voluminous descriptions of controversies that the company and learned that these were influential in the rating and also through the impact that they have on their communications with 'buy-side' firms.

It was therefore frustrating to the company (as it is to many other companies) to find a number of inaccuracies within these reported 'controversies'. Amongst the company noted that the time period over which 'controversies' live on in rating agency databases can extend way beyond the point at which the controversy in question has been addressed by the company and resolved with relevant stakeholders - whether these be regulators, consumers or local communities.

"When does the statute of limitations run out on controversies?"

Step 2: Keep communicating to ESG ratings agencies

The first step was to communicate privately to the ESG ratings agencies about the controversies that were inaccurate or had been resolved.

In common with other companies, however, the team at Volkswagen AG found that the follow-up information provided did not appear to be taken into account and the requisite changes were not made.

Step 3: Communicate directly to buy-side investors

One solution to this problem is to talk directly about it to the buy side asset managers who are the clients of the ESG ratings agencies - in the hope that they will give feedback to the agencies to recognise the progress made by the company and the corrections that need to be made to controversies reports to recognise this.

This has some impact (in assuaging concerns of existing shareholders) but was not found to solve the whole problem. So, the team at Volkswagen AG tried another approach:

Step 4: A new mindset required

Previously, the company had been somewhat passive and avoided public reaction to controversies - even in circumstances where it had developed responses to the issues raised. Furthermore, communications had been piecemeal and had tended to focus on individual news items.

Volkswagen AG had observed that there was an opportunity with those ESG ratings agency analysts who are more topic-orientated and could, therefore, come to understand the 'back story' behind a controversial situation, its evolution and the resolution.

Step 5: Gather and verify information internally

As a first step, Volkswagen AG’s IR team collected all the written analysis and text on controversies it could find and followed these stories up for three months.

They checked key controversies “slice by slice” will colleagues to determine which issues they could be comfortable responding to and clarified all of the necessary information to ensure that responses could be comprehensive and accurate. Senior Volkswagen AG IR staff met each stakeholder to “tick the box on each concern, with an answer that finds closure for them”.

In terms of the wider investor narrative, the company has grappled with a significant number of legal cases, large and small. As cases are resolved, it’s been important to let stakeholders know about progress on these.

A speaker from the IR team described this step by step process as “very methodical, it's a Germanic way to get stakeholder sign-off”.

Step 6: Communicate differently

As a result, the company was able to add a new 'ESG Controversies' section to the IR pages of its website - to address - issue-by-issue - the concerns raised within ESG ratings reviews. 

Step 7: Communicate differently to ESG ratings agencies

Importantly, the company also changed the way that it communicates on controversies to ESG agency analysts:

• News stories had to be cross referenced to an ESG rating criterion such as risk management, country governance, business ethics, audit trails and monitoring etc.
• In order to do this, the company needed to understand the thinking and procedures applied by ESG ratings agencies and also to respond to their needs.
• This way, the company believes, it is better able to deliver responses in a way that makes it easy for ESG rating agencies to fit into their research models.

Step 8: … and keep on communicating

• Now that this web platform and communications process has been established, Volkswagen AG is in a position to roll it out - in a forward-looking manner to address issues that could become controversial in future - such as the lithium supply chain.

Tips for other companies

We asked Volkswagen AG’s IR team for some 'lessons learned' and tips that might help other companies navigate communications challenges that they face around 'controversies'. In the spirit of 'never wasting the learning opportunities from a crisis situation', the company reflected that:

• A good move is to “make a list of all of the ESG analysts that cover your company on the buy-side and keep them close”. Talk to them often and build relationships the old-fashioned way.
• Take the outsider's position on controversies that you face - even where these are critical and upsetting it is helpful to understand them and to bring them into your company.
• It is the role of IR - in the face of controversies - to communicate investors' views back to management and to be forceful in making sure that internal managers take on board this feedback.
• Be proactive in reaching out to groups such as the Transition Pathway Initiative and Climate Action 100+. Influential research providers and lobbyists are important to a company's ESG standing - so it pays to have identified these and to be in contact with them.
• The Sustainability department has learned that the ESG rating agencies use “bots” to read the relevant reports and will in future rephrase the reports to be more “bot” friendly.

Afterword:

VOLKSWAGEN AG expects a moderate positive impact from having re-joined the UN Global Compact in February 2021 and is actively communicating this to stakeholders at every opportunity. Sustainable-IR thanks the company for contributing this case study and is happy to support this communication.