Crisis management and rebuilding reputation at Volkswagen
Talking to Oliver Larkin, the group head of IR at Volkswagen who took over the role as the company’s well-publicized diesel scandals were hot copy for the world’s media, it’s interesting to hear that it’s only in the last six to 12 months that long-only investors have increasingly started asking ESG-related questions. This would indicate that it’s something other than the emissions scandals that has pushed up engagement around ESG issues.
‘The impression I get is that ESG screening has increased significantly,’ says Larkin. ‘I think it has much to do with climate change and pension funds and the like wanting to make sure they’re investing in the right sort of industry, in industry that supports the goals of the Paris Agreement.’
Speaking to IR Magazine in March for the Who’s afraid of the big, bad governance wolf? feature in the summer 2019 print issue, Larkin explains that as the company’s CEO had recently noted, ‘Volkswagen represents around 1 percent of global CO2 emissions if you include all our cars on the streets, which makes us an important player in the whole climate change discussion.’
He also notes that until the diesel scandal – in which it was revealed that Volkswagen (and other big-brand carmakers) had been installing secret software to make engines appear cleaner in tests than they were on the road – came to light in 2015, with a follow-up scandal in 2018, Volkswagen was in fact a founding member of the UN Global Compact and the only automotive company in the FTSE4Good Index.
As a result of the diesel revelations, the firm suspended its membership of the UN Global Compact and was dropped from the FTSE4Good Index – something that Larkin says still means some investors are unable to buy the stock.
Noting that the emissions story will be four years old in September, Larkin says the conversation has certainly evolved – but not disappeared: ‘For investors, while the issue is more or less understood and managed, the news flow continues in the background on the legal cases, which generates further headlines and commentary.’
Handling a global crisis
Something that Larkin says ‘slightly complicated matters’ when the scandal came to light was that the head of IR had left the company in May 2015, and Larkin – number two in the team – was based in London rather than Germany.
The company had previously had a non-IR person ‘as a sort of temporary head of the team’ until the scandal broke. ‘From the moment the diesel crisis happened I was working Monday to Friday in Germany, working with the interim head of IR and managing, from an IR perspective, how we handled the crisis,’ Larkin recalls.
‘As a company, we immediately put in place a task force team, with representatives from the communication side but also from the technical side and the legal side evaluating the information as it was coming through – and those people were working 24/7.’
Volkswagen also brought in specialist situation consultants, both in Germany and in the US but more or less working globally to help the company ‘manage the message and to manage the relationship into the different legal environments we were dealing with,’ Larkin continues. ‘And of course you can imagine that on the legal side we had significant external support on board as well.’
The IR team at the time was made up of 12 people based across the UK, Germany, the US and China – and Larkin says the impact of the scandal differed in different regions, noting that in China, for example, where Volkswagen has no diesel market, sales continued to climb until last year. Impact on the company’s reputation also varied from one country to the next, with Larkin noting that the company was perhaps harder hit in Germany and the UK than elsewhere.
Looking at things from a global perspective, however, sales continued to rise steadily. Did this make conversations with analysts and investors easier? ‘It’s common knowledge that our reputation has been damaged,’ Larkin says, which has an impact even if sales remain strong.
The market response
The investment response was varied, Larkin notes, with some investors taking advantage of the low share price and betting on gains while for others – particularly on the ESG side – Volkswagen became a no-go area. There was also a sell-down by some long-only investors and the company’s share register ‘became a lot more hedge-fund centric’ as investors tried to guess how the story would progress. But the fact that some investors were apparently unfazed by the scandal doesn’t mean Larkin and his team took their roles lightly.
Larkin says he’s ‘aware of one or two investors who left the industry or left their companies, in part because of their portfolio performance in that year, which of course was impacted by their investments in Volkswagen. And that’s something I personally find quite difficult.’
He adds that although these discussions often focus on equity investments, on the fixed-income side the issue of ESG has also ‘climbed very much up the agenda’.
‘As a result of the scandal, for example, we didn’t issue any dollar-denominated bonds for more than two years – and the US bond market is an important source for us,’ Larkin explains. ‘A company like ours relies on €30 bn to €40 bn ($34 bn to $45 bn) of debt issuance per year and for any impact on ESG to hit the income side is something we have to take very careful note of.’ Volkswagen returned to the market in fall last year ‘as things settled down,’ he adds.
The growth of ESG
Going back to his earlier comments around the growth of ESG, Larkin says ‘ESG has picked up for everybody across the auto sector. The whole emissions issue has become a topic all auto sector IROs have had to deal with because others have also been under investigation and found wanting.’
But what’s driving the more recent shift? ‘There seems to be a much stronger awareness around ESG issues,’ notes Larkin. ‘I think there’s also a much stronger lobbying group from inside the investment community, which is building alliances across investors to drive change in the finance community. Governments, of course, are also pressuring investors to use their votes in AGMs and be more direct in how they steer their underlying investments.’
In a way, the diesel scandal also helped shine a brighter light on ESG issues, he adds: ‘Investors are being perhaps more outspoken and a little bit more aggressive in promoting their views on these issues.’
The way investors approach ESG issues internally is also evolving, Larkin says, citing a conversation with someone from a ‘very global fund’ who has been tasked with designing the framework around that fund’s ESG screening. ‘He’s on the fixed-income side and he’s designing the ESG screening tool,’ he says. ‘That for him is something new – in the past it was much more of a junior activity.’
Despite the damage to its reputation from the emissions scandals, Volkswagen is responding to the growing demand for ESG information. ‘Diesel is something that will always be in our history, and we have to take that into account, but one thing we did in response to all this was to hold an ESG forum in Berlin in July last year where we had about 40-50 attendees,’ says Larkin. ‘At least twice a year we also do ESG roadshows and I just see that increasing more and more in the months and years ahead.’
This is a longer version of an interview with Oliver Larkin of Volkswagen for the summer 2019 issue of IR Magazine