We permit the publication of our auditors’ report, provided the report is published in full only and is accompanied by the full financial statements to which our auditors’ report relates, and is only published on an access-controlled page on your website, to enable users to verify that an auditors’ report by independent accountants has been commissioned by the directors and issued. Such permission to publish is given by us without accepting or assuming any responsibility or liability to any third party users save where we have agreed terms with them in writing.

Our consent is given on condition that before any third party accesses our auditors’ report via the webpage they first document their agreement to the following terms of access to our report via a click-through webpage with an 'I accept' button. The terms to be included on your website are as follows:

I accept and agree for and on behalf of myself and the Trust I represent (each a "recipient") that:

  1. PricewaterhouseCoopers LLP (“PwC”) accepts no liability (including liability for negligence) to each recipient in relation to PwC’s report. The report is provided to each recipient for information purposes only. If a recipient relies on PwC’s report, it does so entirely at its own risk;
  2. No recipient will bring a claim against PwC which relates to the access to the report by a recipient;
  3. Neither PwC’s report, nor information obtained from it, may be made available to anyone else without PwC’s prior written consent, except where required by law or regulation; and
  4. PwC’s report was prepared with Hermes Property Unit Trust's interests in mind. It was not prepared with any recipient's interests in mind or for its use. PwC’s report is not a substitute for any enquiries that a recipient should make. The financial statements are as at 25 March 2017, and thus PwC’s auditors’ report is based on historical information. Any projection of such information or PwC’s opinion thereon to future periods is subject to the risk that changes may occur after the reports are issued and the description of controls may no longer accurately portray the system of internal control. For these reasons, such projection of information to future periods would be inappropriate.
  5. PwC will be entitled to the benefit of and to enforce these terms.
I accept

1. Select your country

  • United Kingdom
  • Austria
  • Australia
  • Belgium
  • Denmark
  • Finland
  • France
  • Germany
  • Iceland
  • Ireland
  • Italy
  • Luxembourg
  • Netherlands
  • Norway
  • Singapore
  • Spain
  • Sweden
  • Switzerland
  • USA
  • Other

2. Select your investor type

  • Financial Advisor
  • Discretionary Investment Manager
  • Wealth Manager
  • Family Office
  • Institutional Investor
  • Investment Consultant
  • Charity, Foundation & Endowment Investor
  • Retail Investor
  • Press
  • None of the above

3. Accept our terms and conditions

By clicking Proceed I confirm I have read the important information and agree to the terms of use.


The Hermes Investment Management website uses cookies to remember your preferences and help us improve the site.
By proceeding, you agree to cookies being placed on your computer.
Read our privacy and cookie notices.

Consequences of Volkswagen’s emissions scandal

Engaging with car manufacturers

Home / EOS Blog / Consequences of Volkswagen’s emissions scandal

Since the emissions scandal broke at Volkswagen, we have been engaging intensively with the company and its peers.

Governance concerns
We had an intensive engagement with VW between 2006 and 2009, with a focus on the company’s board composition, partly a result of its shareholding structure, and the role of its – now former – chair Ferdinand Piëch. Our engagement involved meetings with the company and speaking at its 2006 and 2007 AGMs. Through our activities we successfully managed to encourage some structural change, for example, the establishment of a corporate governance committee and greater focus on corporate governance.

However, particularly following the tie-up with the Porsche company,we realised the impact of our engagement on board issues would be limited as VW’s board is dominated by two families, who control the majority of voting shares, and also comprises representatives of the German state of Lower Saxony, as well as 10 powerful employee representatives. Since the significant investment of Qatar Holdings in 2009, the board has also included several sovereign wealth fund representatives. The supervisory board has been short of strong, genuinely independent non-executives for many years and at present only has one independent director. Due to the infeasibility of our engagement, we therefore temporarily scaled back our efforts. Nevertheless, in 2012 we still wrote an open letter to the company regarding the ineffectiveness and increasingly questionable composition of the supervisory board, as it proposed to shareholders to elect Piëch’s wife as a non-executive director and the now former CEO Martin Winterkorn was awarded €20 million as a result of an nontransparent remuneration system.

Despite the abrupt departure of Piëch in April 2015, we continued to have and communicate our serious concerns about the influence of the Porsche/Piëch families, the composition of VW’s supervisory board, management board remuneration and the implementation of the company’s ambitious growth strategy. There are indications that VW’s corporate governance and culture may have contributed to the emissions scandal or at least allowed it to remain undetected for many years.

Emissions scandal
We made contact with the company immediately after the emissions scandal broke and discussed what further actions to take with a number of other institutional investors. We welcomed the resignation of VW’s CEO and the departure of other key executives as a first step in dealing with the fallout from the scandal.

However, after VW appointed two corporate insiders as CEO – the former head of Porsche – and chair – a former VW CFO – we publicly voiced strong concerns about these choices although we understood the apparent lack of alternatives. The appointments made by the supervisory board suggested the company has not recognised the need for fundamental reform. We strongly believe that the new CEO and chair should overhaul VW’s corporate governance, in particular the composition and effectiveness of its supervisory board, and create a corporate culture which ensures that the trust of its customers and the societies in which it operates and distributes its vehicles will not be compromised again in the way it has been. In our view the culture, processes and the decision-making of the supervisory board are the fundamental problems at VW, which trickle down to the whole organisation.

Following VW’s announcement that the supervisory board had decided to have the court appoint the CFO as chair-elect instead of having a discussion and a vote about this move at a shareholder meeting, we wrote a strongly worded letter to all of the supervisory board members. We once again highlighted that this move not only goes against best corporate governance practice in Germany but gives rise to serious conflicts of interest. The chair-elect has served as a member of the management board since 2003 and as CFO played a key role among  the most senior VW executives for over a decade. We questioned his ability to robustly and objectively investigate what happened at the management board level which is responsible for the company’s culture and – should there be any grounds for legal claims – enforce these against his former colleagues, and possibly himself.

While we remained critical of the appointments of CEO and chair at VW, we firmly welcomed the external appointments to VW’s management board and senior executive team – responsible for integrity and legal affairs and group strategy respectively. The appointment of the two outsiders is a starting point in addressing the concerns we have about the new CEO being an insider.

Even though VW has had a compliance officer since 2001, the fact that there will now be direct board level responsibility for integrity and legal affairs seems to signal that VW will take governance and compliance much more seriously in future. With a background in legal matters, the new board member should contribute to dealing with the current allegations and future matters related to the scandal. Her experience – also gained at competitor Daimler – will help in the development of a compliance system that detects problems earlier. Just as with her selection, the appointment of head of group strategy shows that the company is opening up to external candidates, as the individual previously held senior roles at a General Motors’ Opel division and will put greater emphasis on exploring strategic options than in the past.

We were pleased about VW’s introduction of five top priorities, which its new CEO outlined in its third quarter earnings call. These are regaining trust by helping customers, uncovering the causes for the emissions scandal, introducing a new decentralised structure, creating a new corporate mindset and re-defining targets.

However, the lack of effective communications with investors in the wake of the scandal has been concerning. We need more substantial and specific information on what happened, how VW intends to rectify the issues and deal with the consequences and, most importantly, about a more proactive strategy on changing corporate processes and governance as well as the company’s culture. We challenged the quality of VW’s communications regarding the crisis and encouraged an update in our dialogue with the company. We were therefore pleased when VW’s new chair and CEO provided a detailed update on the company’s investigations, co-ordinated by a special committee of the supervisory board, and initiated changes. The company claimed to be progressing on all five of the priorities, including on devising technical solutions for the vehicles affected, implementation of which was due to begin in January 2016.

VW’s internal investigations indicate that the large-scale cheating on nitrogen oxide emissions was due to the combination of three factors: the misconduct and shortcomings of individual employees, weaknesses in certain processes and a mindset in some areas of the company that tolerated breaches of rules. It outlined some of the deficiencies in processes and explained how it plans to address these. VW confirmed that it in future, emissions tests will be evaluated externally and independently and that randomly selected real-life tests to assess emissions behaviour on the road will be introduced.

While we welcomed VW’s update on the emissions scandal, we remain concerned about the lack of discussion of wider corporate governance reform, including with regard to the composition and effectiveness of the supervisory board. We believe this is essential to address effectively the underlying problems and will therefore continue to focus on this in our engagement and seek meetings with the chair of VW’s supervisory board and management board members. While VW seems to have recognised the need to change its culture, it has not yet indicated whether it plans a systematic review of the underlying grievance issues and will implement a structured programme to bring about the necessary changes. In addition, we felt the tone and body language of the company’s presenters were not suited to the seriousness of the crisis, suggesting that there may be limited appetite for real and sustained changes. The company has indicated that we will have an opportunity to meet its chair in early 2016, after which we will consider together with other institutional investors what further steps to take ahead of VW’s AGM in April 2016.

Public policy
The emissions scandal however goes beyond VW. It questions the validity of laboratory emissions testing from vehicles. Several studies have shown that on-the-road emissions and fuel consumption can be substantially higher than the levels reported during lab tests7. For that reason, relevant policy-makers need to ensure tests are more reliable and coherent, particularly as they are setting standards for CO2 and other emissions.

Under the auspices of the Institutional Investors Group on Climate Change (IIGCC), we collectively wrote to European policy-makers to call on them to make changes to the EU’s carbon-emissions testing programme for road vehicles to restore confidence in testing procedures.

Peer responses
We also raised a series of questions with other car manufacturers in relation to their potential exposure to the issue. All of the car manufacturers we engaged with stated that they conduct emissions testing in accordance with all the relevant standards and to the best of their knowledge do not engage in illegal practices which enhance emissions performance of their engines in assessments. But there was wide acknowledgement of the discrepancy between emissions levels on the road and in test environments.

Sector-wide engagement
Because the VW scandal is likely to have implications for the global automotive industry, as part of our sector-wide engagement on environmental issues, carbon and climate change we continue to review the corporate governance, compliance structures and processes and internal risk management of car manufacturers. We are also seeking to clarify their position and lobbying activities on EU and US emissions targets and new testing procedures.

We are assessing manufacturers’ product portfolios and progress on introducing sustainable vehicle technology, such as hydrogen-powered engines. We also continue to assess progress on reducing CO2 fleet emissions and preparedness for future emissions targets. As part of our public policy engagement, we will also collaborate further with key industry bodies and NGOs, including the IIGCC.


6 Gaseous emissions from light-duty vehicles: Moving from NEDC to the new WLTP test procedure, Environmental Science & Technology, June 2015rnrn the Gap 2015: Closing the chasm between test and real-world car CO2 emissionsrnrn Control Technologies for Euro 6 Diesel Passenger Cars

Share this post:
Hans-Christoph Hirt Dr Hans-Christoph Hirt is an executive director and board member at Hermes EOS and as Head of the organisation responsible for the sustainable success of the business. He leads and oversees the global engagement programme and the quality of the services Hermes EOS provides to its clients around the world. Hans also leads some high-profile stewardship activities, including priority engagements with major companies in Asia and Germany, as well as interactions with key regulators and organisations. Prior to joining Hermes EOS, Hans worked with international law firm Ashurst. He is the author of numerous publications on corporate governance and law, responsible investment and stewardship. Currently, he is a member of the Steering Committee of the UN PRI Investor Engagement Clearinghouse and the Shareholder Responsibilities Committee of the International Corporate Governance Network. In 2015, he joined the Institutional Investor Council in Malaysia. Hans is a UK-qualified lawyer, holds degrees in Business Administration from universities in Germany and the UK, the ACCA qualification and a PhD from the London School of Economics (LSE). He continues to be involved in academia as a Corporate Governance Fellow at the LSE’s Financial Markets Group and a Teaching Fellow at University College London. Hans speaks French, German and Mandarin.
Read all articles by Hans-Christoph Hirt

Setting the scene

One of the biggest corporate scandals to emerge in 2015 was that German car manufacturer VW had installed defeat devices in 11 million of its vehicles, which detected when they were subject to emissions tests. According to the US Environmental Protection Agency, the cars would switch on emissions-control devices for tests but on the road emit much higher levels of nitrogen oxide. Further allegations of defeat devices followed, implicating other types of VW, Porsche and Audi models, while internal investigations by VW discovered that approximately 36,000 cars, including those with petrol engines, had been sold with their carbon dioxide levels stated too low and fuel efficiency stated too high. The negative news at one point led to a drop in VW’s share price of more than 40%6 in 2015 although it has since recovered significantly. The company announced in September 2015 it had set aside an initial €6.5 billion provision for the costs of putting right the 11 million vehicles. Due to the risk to VW’s reputation and earnings, the company’s debt was downgraded by rating agencies S&P, Fitch and Moody’s. The scandal has cast a shadow over VW and the entire car manufacturing industry, particularly as corporate emissions reductions were thrown into the spotlight ahead of the COP21 UN climate change summit in Paris.

Find posts by author

  • Alex Knox, ACA
  • Andrew Jackson
  • Bill Mackenzie
  • Bruce Duguid
  • Christine Chow
  • Claire Gavini
  • Colin Melvin
  • Darren Brady
  • Dominic Burke
  • Dr Michael Viehs
  • Emeric Chenebaux
  • Emma Hunt
  • Geoffrey Wan, CFA
  • Hans-Christoph Hirt
  • Harriet Steel
  • Ilana Elbim
  • Jaime Gornsztejn
  • Jonathan Pines, CFA
  • Joseph Buckley
  • Leon Kamhi
  • Louise Dudley
  • Mark Sherlock, CFA
  • Maxine Wille
  • Michael Russell, CFA
  • Michael Vaughan
  • Michael Viehs
  • Natacha Dimitrijevic
  • Nick Spooner
  • Nina Röhrbein
  • Peter Hofbauer
  • Philip Nell
  • Rochelle Giugni
  • Roland Bosch
  • Sachi Suzuki
  • Saker Nusseibeh
  • Silvia Dall’Angelo
  • Tatiana Bosteels
  • Tim Goodman
  • Tommaso Mancuso
  • Yasmin Chowdhury

Find posts by category

  • strategy