The VW perspective on achieving positive change post ‘diesel-gate’

At Van Lanschot Kempen our credit team take an active approach to investing and engagement with companies is  part of this active approach. The aim here is to deliver results and to help clients navigate through the transitions to a more sustainable economy/world. Today, we would like to talk about  a specific engagement case handled by the credit team, to illustrate how this approach works. 

The Euro Credit strategy has been invested in Volkswagen since 2008. But the company is not blemish free and has had several sustainability issues, most important of which is the emissions scandal referred to as “diesel gate”.  Van Lanschot Kempen decided not to divest Volkswagen bonds for all its portfolio’s, but rather to engage with the company. Why did we choose to engage, and has this engagement paid off?  

Moderator:

Loes Wingens - Head of Wholesale, Wholesale & Institutional Clients

Speakers:

Alex Hunger - Member of the Investor relations team of Volkswagen

Lizelle du Plessis- Director Fixed Income Portfolio / Fund Management

Transcript

[00:02–00:13] Loes: The credit team at Van Lanschot Kempen takes an active approach to investing and engagement as part of that. The aim here is to deliver results and help clients navigate through transitions.

[00:14–00:38] We would like to illustrate that to you today by talking about a specific engagement case that the credit team performed. The strategy has been invested in Volkswagen since 2008. But that company is not blemish-free and has had several sustainability issues, most important of which is the emissions scandal that referred to as ”diesel gate.” And Van Lanschot Kempen decided not to divest Volkswagen bonds

[00:38–00:57] for all of its portfolios, but rather to engage with the company. Now, why did Van Lanschot Kempen choose to engage? And has this engagement really paid off? Before we dive into that, I would like to point out that this podcast is made for professional investors and for information purposes only. It provides insufficient information for an investment

[00:58–01:15] decision and it does not contain investment advice. The value of investments and the income from investments can fall as well as rise and are not guaranteed. Investors may not receive the amount originally invested. My name is Loes Wingens and here in the studio with me are Alex

[01:15–01:30] Hunger, who is a member of the investor relationship team at Volkswagen, and Lizelle du Plessis, who is a portfolio manager in the credit team of Van Lanschot Kempen. Welcome. To start with you, Lizelle, can you please tell us why did you decide to engage with Volkswagen?

[01:31–01:58] Lizelle: Great question Loes, and thank you. As you've mentioned, diesel gate was one of the biggest corporate affairs in history. Following this, Volkswagen Group was assigned the lowest ESG ratings and also a UN Global Compact fail. We wanted Volkswagen to commit to change its culture in order to ensure ethical conduct by employees going forward. In addition, we also decided to engage with

[02:00–02:20] Volkswagen on the development of electric vehicles in compliance with the Paris Agreement, given our own commitment to become a net zero wealth manager by 2050. We agreed that continued investment in Volkswagen could only be justified if the company demonstrated significant positive change. 

Loes: Thank you, Lizelle.

[02:22–02:34] So the issues you mention are quite serious and there are many other bonds out there. So why did you not just simply divest from Volkswagen? 

Lizelle: Good question. As an active asset manager, we are acting

[02:35–02:48] on behalf of clients with the money entrusted to us. Therefore, we see it as our duty to help clients navigate transitions such as the climate transition. And one of the ways to do this is via engagement.

[02:51–03:04] We believe that if we divest we are unable to have positive impact. When engaging with companies we raise the issue and then consider whether a company is willing and able to improve. If a

[03:06–03:21] company acknowledges the issue that is a good step and we are able to continue our engagement. We set clear milestones at the outset and if we don't see progress in line with these milestones, we would divest.

[03:22–03:33] Loes: So thanks, Lizelle. You take a clear approach on engagement with milestones set to achieve those results. Alex, many thanks also for you for being here. Now, what did Volkswagen think

[03:34–03:53] of this all? 

Alex: Well, thanks again for inviting us to this panel. The diesel issue was also extremely traumatic for Volkswagen and its stakeholders and was taken very seriously. Volkswagen Investor Relations needed to engage with the investment community on a continuing basis for a very long time

[03:53–04:09] to show the progress that was being made around this issue, the Volkswagen integrity culture, and ESG in general, in order to rebuild trust. We were able to show step-by-step progress, such as with the successful end of the United States Department of Justice

[04:09–04:23] imposed monitorship or re-entering the UN Global Compact. 

Lizelle: To add, from our perspective, the engagement went well. We were really happy to see Volkswagen's responsiveness to our requests,

[04:23–04:39] but also in relation to the other important steps taken. The company clearly recognized that there were several serious issues and acted upon it in a reasonable time frame. 

Loes: So, Alex, you already mentioned that you needed to engage with the investment community.

[04:40–04:56] What was your impression of how the Van Lanschot Kempen team conducted the engagement? And in what way was it perhaps different from conversations and engagement you did with other investors? 

Alex: Well, the Kempen portfolio managers were very patient and supportive with clear and constructive feedback, even in difficult times.

[05:01–05:24] This wasn't outsourced to third parties or service providers. They were also very willing to listen and observe. And also the engagement was not emotional, blame-oriented or condescending, which would have been understandable under the circumstances. From our side, we also learned from our ESG engagement with Van Lanschot Kempen

[05:24–05:38] to bring our ESG investor relations work to a new level with a dedicated ESG team. We also have regular conferences as well as roadshows to let other participants in on the improvements we took from engagement with Kempen.

[05:39–05:52] Loes: Thank you, Alex. So in a way, you could say that the Van Lanschot Kempen team had a different approach from others. And that really brings us to the main question of today. What are the results of the engagement that you conducted, Lizelle?

[05:54–06:09] Lizelle: Yeah Loes, the engagement was successful in our view. And all the engagement objectives that were set at the outset were met. So if I elaborate a bit further, Volkswagen has completed its integrity program

[06:09–06:25] with regular refreshes for cultural change. They've developed an integrity index and that was aimed at monitoring progress and identifying further actions to be taken. And also Volkswagen conducts an opinion survey amongst employees

[06:26–06:38] asking them whether it's possible to act with integrity. And integrity-related goals are now an integral part of the remuneration of the management board. 

Loes: So if I hear you, Lizelle,

[06:40–06:52] good progress was made on the cultural and on the integrity side. But what about the engagement on the environmental side? 

Lizelle: Yes, on the environmental side, there have also been substantial steps

[06:52–07:11] taken. Most prominently, really, is the ambition to have a CO2 neutral fleet by 2050 and to fully comply with the Paris Agreement. Volkswagen is committed to electrification with the aim to increase the proportion of the fleet that is electric to at least 40% by 2030.

[07:12–07:26] And 50% of global deliveries should be all electric by 2030. We really appreciate the responsiveness of the company and the willingness to acknowledge problems. Volkswagen certainly differentiates

[07:27–07:45] themselves by publishing their response to controversies on their website.

Loes: So thanks, Lizelle. That sounds like good progress and results on that specific engagement case. But now a new serious issue has arisen. And that now also has to be dealt with.

[07:46–07:58] Could you please tell us, Alex, what exactly is going on? 

Alex: Well, thank you. For a number of years, there have been growing concerns about the use of forced Uyghur labor in the province of Xinjiang, China.

[07:59–08:18] This has been noted by various NGOs and agencies like the Human Rights Commissioner. Recently, ESG rating agency MSCI alleged that the joint venture with Volkswagen, SAIC, have been hiring employees from the so-called vocational training camps and assigned a red flag to Volkswagen.

[08:19–08:35] The situation is very complex. Volkswagen is operating China through joint ventures, which are entities that are not controlled by Volkswagen. The plant with the Chinese OEM SAIC in the city of Urumqi has been operating since 2013 on that

[08:37–08:52] basis. 

Loes: So that indeed sounds like a complex situation, Alex. What actions have been taken? 

Alex: As with diesel, we do not take this subject lightly and engage with many, many investors and have gone to great lengths to find solutions.

[08:53–09:07] We endeavor to communicate quickly and transparently with all stakeholders. We also try to make it clear that despite MSCI's interpretation of a global compact failure, we remain a member in good standing of the real UN global compact.

[09:10–09:29] Loes: Tell me more about it, Alex. 

Alex: The code of conduct of the SAIC-Volkswagen joint venture secured good working conditions with above average pain and underdeveloped region. Volkswagen does not tolerate violations of human rights, and we want to investigate the allegations that we consider incorrect.

[09:31–09:46] For example, in February, the board member of Volkswagen AG responsible for China, Ralph Branstetter, visited the Urumqi plant to verify the situation on the ground. He has talked to employees and the management team and found no evidence of forced labor.

[09:48–10:02] The report, including data of employment tenure, can be found on our Volkswagen ESG controversies website. 

Loes: Thanks, Alex. And Liesel, what about the Van Lanschot Kempen team? What actions have you taken?

[10:03–10:18] Lizelle: Yes Loes, we've started a new engagement with Volkswagen due to the seriousness of this issue. We want Volkswagen to conduct an independent third party audit that confirms that ethnic minorities were not and are not hired

[10:19–10:43] through labor transfer programs. We are, of course, also engaging with MSCI on this topic, given that the red flag has been assigned on the basis of allegations only. 

Loes: So this sounds like a complex situation with various stakeholders involved. Now, what are the next steps, Alex Lizelle? Can you tell about that? Alex? 

Alex: Well, we at Volkswagen headquarters consider an independent

[10:44–11:02] audit as an option to clear Volkswagen's reputation and to resolve the MSCI red flag, which has troubled our relations with the investment community and raised our cost of capital. The management and other internal stakeholders are now working towards potentially securing the agreement from our joint venture partner,

[11:03–11:19] SAIC, for an independent audit. As soon as we can move forward, we will share this more widely. 

Lizelle: On our side, we are following developments very carefully, and it is important for us that this matter is resolved as a matter of principle. We understand that it's difficult for independent

[11:21–11:38] third parties to access Xinjiang, but similar to our experience on the first engagement, Volkswagen has been very responsive, and as a result, we are cautiously optimistic that the issue can be solved. 

Loes: So thank you, Lizelle and Alex, for telling us more about

[11:38–11:52] this engagement and how it went. I think today we've heard that also as bond investors, you can make an impact if there is a willingness to engage, if there is a willingness to keep a

[11:52–12:09] continuous dialogue. And it can be rather complex with many stakeholders involved. So it also requires a bit of patience. Change doesn't happen overnight, but it can really happen. I hope that with this, we have shown you, our listeners, a good illustration of how this

[12:10–12:17] works in practice. Many thanks again, Lizelle, Alex, for being here and thank you for listening. This brings us to the end of the podcast.