Usefulness of Sustainability Indices in Evaluating Corporations

Volkswagen Group states that their business is dedicated to sustainable, transparent and accountable corporate governance although it faces challenges in executing this at all phases in its value chain (Volkswagen, 2017).  The corporation follows sustainable development goals formulated by United Nations in ensuring it attains its goal of sustainability. Additionally, Volkswagen is implementing the endorsements of German Corporate Governance Code and is coordinating its sustainability undertakings throughout the entire corporation (Volkswagen, 2017). Volkswagen (2017) defines sustainability as “striving for economic, social and environmental goals in a way that gives them equal priority.” The main goal of the company’s CSR activities is to contribute towards enhancing its reputation and worth.

Volkswagen’s CSR strategies and performance

The company’s strategy of becoming a sustainability mobility in CSR through use of the future program TOGETHER-Strategy 2025 which was launched in 2016 (Volkswagen, 2018). The program came as a way of repairing the company’s damaged reputation following the emission scandal. The strategy will help Volkswagen become more innovative, consumer focused, sustainable, efficient and geared towards producing lucrative growth.

Dow Jones Sustainability Index

The Dow Jones sustainability index (DJSI) evaluates the performance of the leading 10% per industry of 2,500 biggest corporations in the S&P market index. The corporations are evaluated on yearly basis through RobecoSAM’s company sustainability assessment. Volkswagen being a top S&P company has undergone the evaluation and has been rated severally among the top sustainable corporations.  In 2014, the company made good scores in global ratings and held the topmost position in its sector. According to DJSI for the whole world, and that of Europe, Volkswagen scored 88 points out of 100 (Volkswagen, 2014).  In another rating in Carbon Disclosure Project (CDP), Volkswagen received an A rating in CDP Global 500 Index with 99 out of 100 points (Volkswagen, 2014). The DJSI report for 2015 had also rated Volkswagen the winner in the Automobiles & Components category. The award was however canceled after reports emerged that the company had installed defeat devices in their cars which helped improve results and cheat emission tests in US. The report was issued by Environmental Protection Agency (EPA) which found out that the company had violated environmental laws and their cars were emitting large carbon dioxide levels (Hotten, 2015). The company admitted to cheating emission test in US and began working on its reputation and brand image. Following the accusation, DJSI removed Volkswagen from its indices after a media and stakeholder analysis was conducted to evaluate the situation (RobecoSAM, 2015).  Since this scandal, Volkswagen has not been on the DJSI indices which implies its sustainability rating is still low.

Usefulness and Limitations of DJSI in evaluating Corporations

Quantitative and non- quantitative data is important in evaluation of a company because it enables the assessor to determine the financial health of a company. The data used is both financial and non-financial. Investors must make decisions on whether to invest in a given company. For effective decision making, an investor relies on accurate information which necessitates availability of data and careful evaluation. Data enables the investor to determine if the company is profitable and evaluate its liquidity and solvency. Data also helps the investor forecast on the future of the company and determine if it will be profitable and whether they are likely to earn return from investing in that specific corporation.

The use of data in evaluating companies also has its limitation mostly because the information used is historical and in some cases, it may not be an accurate predictor of the future. Moreover, the data is given by company management who could manipulate it and give investors misleading information. Although corporations are audited to determine if the financial statements are true, there have been cases of misleading data such as in Enron which through collaboration of management and auditors issued untrue financial statements.

Volkswagen is not a good investment recommendation

 Corporations are engaging in responsible and sustainable business practice not only because they want to make some cost savings but also because it helps them create a good brand image thus creating both business and social values. Volkswagen has been enjoying the good brand image especially from its many awards as a sustainable business and being ranked at the top in several sustainability analysis. The company’s emission scandal has negatively affected the image and reputation. The company’s sales fell by approximately 25% in 2015 and the scandal is expected to cost it much more (BBC, 2016). In addition to these financial impacts, the scandal has had much more invisible and long-term damages ranging from low consumer satisfaction, staff morale and devotion, lack of investor confidence and effect on brand trust and reputation. The company’s shares had hit a high of $247.85 in March 2015 but dropped to $91.98 in September 2015 (Yahoo finance, 2018).  The shares, however, have been rising since the scandal but are yet to hit the high of $240. Currently, Volkswagen shares are trading at $147.42 as at 1st

October 2018 a drop from $177.02 early this year (Yahoo finance, 2018). The shares are still volatile and the company has not yet regained its reputation and stakeholders’ trust thus, Volkswagen is not a good investment.

References

BBC. (2016, January 8). VW sales fall for first time in 11 years. Retrieved from https://www.bbc.com/news/business-35267164

Hotten, R. (2015, December 10). Volkswagen: The scandal explained. Retrieved from https://www.bbc.com/news/business-34324772

RobecoSAM. (2015, September 29). Volkswagen AG to be Removed from the Dow Jones Sustainability Indices. Retrieved from http://150929-statement-vw-exclusion_vdef.pdf

Volkswagen Konzern. (2017). Volkswagen Konzern - AR 2017 - Sustainability. Retrieved from http://annualreport2017.volkswagenag.com/group-management-report/sustainable-value-enhancement/sustainability.html

Volkswagen Konzern. (2018). Volkswagen Konzern - AR 2017 - Goals and Strategies. Retrieved from http://annualreport2017.volkswagenag.com/group-management-report/goals-and-strategies.html

Volkswagen. (2014). Ratings and Indexes | Volkswagen Sustainability Report 2014. Retrieved from http://sustainabilityreport2014.volkswagenag.com/economy/ratings-and-indexes

Yahoo Finance. (2018). VOW3.DE Historical Prices | VOLKSWAGEN AG VZO O.N. Stock - Yahoo Finance. Retrieved from https://finance.yahoo.com/quote/VOW3.DE/history?period1=1413493200&period2=1539723600&interval=1mo&filter=history&frequency=1mo