Tuesday 25th October 2016                 Change text size:

What can socially-responsible investors learn from the Volkswagen scandal?

VW Badge by Gerry Lauzon via Flickr. Photoblog: takingpictures101.blogspot.com

The Volkswagen emissions scandal may lead socially responsible investors to be better investors, and at long last, outdo traditional investment managers over the long-haul. While the impact of the scandal was immediately reflected in Volkswagen’s stock price, the long-term impact remains a developing story. By Gregg Sgambati, Head of ESG Solutions, S-Network Global Indexes.

Investing for the long-term is the purview of socially responsible investors. Traditional investment analysts will stress if the market has priced in the cost of the scandal in Volkswagen’s stock price (efficient markets should do this of course). But, the real cost to the company is connected to the magnitude of fines, the loss of goodwill, and the consumer.

The first two are most directly reflected on the company’s balance sheet and have definitive timelines. Fines will be accounted for when levied or paid; while loss of goodwill will be reflected in the next annual report. But the consumer response has a less definite time frame and falls into a long-term perspective. Add activist shareholders to the equation, and we expect lower sales.

However, this is not a prediction of the end of Volkswagen nor a post-traumatic resurgence. Either is possible, and socially responsible analysts will look at the company’s economics. It is in the non-economic domain of this scandal where analysts have had the most to learn.

It is clear that VW’s corporate governance had a failure. Whether it was an unaudited internal process that went awry, dismissing the legal and social boundaries created by regulation, or it is a corporate culture that suppresses undetectable cheating, governance is relevant and today it is a measured, non-economic metric. The Thomson Reuters Corporate Responsibility Ratings rated VW below the 38th percentile in corporate governance in the last eight years, out of a global universe of 4,6oo companies. Governance is what socially responsible investors will be looking at the most closely after Volkswagen 2015.

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