ESG ASSESSMENT REPORT

ESG REPORT
ON VOLKSWAGEN

Abstract
The report highlights overview of the company, financial related ratio and analysis, business
development, ESG related activities, strengthen & weakness, industry overview and challenges

Tshering Wangchuk
Wangtrolly89@gmail.com
 Assessment Report

*LEARNER* VOLKSWAGEN ESG Score: 53

84 Years of History: Volkswagen is one of the leading multiband groups in the
Company Details
automotive industry. It develops vehicles and components for the Group's brands, and
Inception 28 May 1937 also produces and sells vehicles in the Passenger Cars and Commercial Vehicles
Employees 670,000 segment with a wider geographical reach across the continents. Established on 28th
Market Price 144.8 May, 1937, the Company's business activities now comprise the Automotive and
Industry Automobile Financial Services division. With an enviable collection of multi high-end brands coupled
with newer technology innovation in the automotive industry, the company is on course
to capture market shares globally whilst maintaining its promise to go carbon neutral by

INDUSTRY, COMPANY AND ESG REPORT FOR VOLKSWAGEN, JAN 2021

Scrip Details 2050.
Mkt Cap (Euro) 81.98 B A promising path for BEST 2025: With enhanced TOGETHER 2025+ strategy, the
P/B (Euro) 0.65 company’s 5 Modules focuses on Best Governance, Best Performance, Best Brand
O/s Shares 206.2M Equity, Software-enabled Car company, and Excellent Leadership. The company aims to
step up pace, focus on strategic projects, and make automobile cleaner, quieter, more
Av Vol 1.34 M
intelligent and safer.
52 Week H/L 183.98/79.98
Pandemic Driven Impact on Industry: The outbreak of Covid-19 across the world
Div Yield (%) 3.36 heavily impacted wide range of industries including the Automobile companies which
Beta 1.50 was already in pain due to negative campaign and stiff competition. This virus outbreak
led to fall in demand for passenger cars by -20.2% globally during the Jan-Sept-2020
Shareholding Pattern period. Similarly, the commercial vehicle also witnessed substantial fall in demand during
the same period due to travel restrictions across the countries.
Shareholders %
Financial Highlights in Jan-Sept 2020: The deliveries to Group customers fell by
18.7% at 6.5 (8.0) million vehicles in all regions which led to decline in sales revenue by
DIIs 14.9 16.7% to Euro 155.5 billion. Operating profit was down by Euro 12.4 billion y-o-y at Euro
FIIs 72.2 2.4 billion driven by fall in volumes. The negative impact on bottom-line was also drag by
Public 12.9 special items (diesel issue) of Euro -0.7 billion in same period.
Strong Product Rollout despite the pandemic: In passenger car segment, it
Total 100
introduced second model based on the Modular Electric Drive Toolkit. Audi shows off the
upgraded Q2 and its Q4 Sportback e-tron concept car. Its brand SKODA debuted Enyaq
iV, the first production model based on the MEB. Other includes, revamped Panamera,
Volkswagen Vs DAX - 1 Year Bentayga, and Caddy California in commercial vehicles segment.
110 110
100 100
ESG related activities: The company successfully placed its first green bonds on the
90 90 market in Sept-2020, with a volume of Euro 2 billion and terms of 8 and 12 years. The
80 80 proceed will be used for the Modular Electric Drive Toolkit (MEB) and the new ID.3 and
70 70
60 60 ID.4 BEV models. It aims to increase the use of green bonds in future to finance its
50 50 comprehensive electric campaign.
40 40
30 30
Annual Review, FY2019: The company clocked an operating profit of Euro 19.3 billion in
20 20 fiscal year 2019. However, the special items due to diesel issues weighed on operating
profit by about Euro -2.3 billion in the same period. The Group witnessed a unit sales
growth of 1.3% at 11 million vehicles in 2019 despite a challenging and competitive
market environment. Subsequently, the sales revenue rose by 7.1% to Euro 252.6 billion
Volkswagen DAX in the same period.

Key Financials (Euro M)

Rev Units Growth ROE D/E P/E G-Margin
Yr. CY EBITDA PAT EPS
Sale (%) (%) (x) (x) (x)

2017 229,550 13,818 11,463 22.5 3.7 9.9 2.8 7.9 19.0
2018 235,849 13,920 12,153 23.5 1.1 10.0 2.9 5.5 19.7
2019 252,632 16,960 14,029 26.6 1.3 10.8 2.9 6.6 19.5
9M2020 155,485 1,693 1,731 2.7 -18 3.8 3.1 19.4 15.0
  Industry Background
The Automotive industry contributes approximately 4.0% to the global GDP, and it’s one of
Market Size the highest employer in the economy. Its market size is about $ 2,755 billion which is
expected to grow at the rate (CAGR) of 3% to $ 3,800 billion by 2030.

A rapid progress in automotive software and electronic market across the world is expected
Growth Story to increase the market share to $ 469 billion by 2030. The driving transformation includes
autonomous vehicles, connectivity, electrification, and shared mobility – offering new growth
opportunities.

The pandemic driven disruption in automobiles sales during 2020 is forecasted to fall under
Covid-19 led Slump 62 million units against 92 million witnessed in 2019. During the Jan-to-Sept FY2020 period,
the global demands for the vehicles fell by about 20.2% - leading to drop in operating margin
and profit.

 Key Highlights in 2019


 Global automobile production in 2019 stood at 92 million vehicles
 Global leader of commercial vehicle production was Greater China which sold 5.3
million vehicles during the same period. 
 Global agricultural vehicle market size in 2019 - $95.6 BN | $118.2 BN by 2026
 Cars sold globally – 75 million units.
 Research and Development Investment – $100.39 billion
 Global revenue contribution to government – $507.78 billion (by 26 countries)

Automotive Industry

IoT-e-Disruption
Millennial
Excess Production Woes
and Cost

KEY
CHALLENGES
Sustainability
Retention of
Talent

Shared Mobility
 COMPANY ANALYSIS

Overview and Activities

GROUP BUSINESS STRUCTURE

Automotive Division
Financial Services Division
Passenger Cars Segment Commercial Vehicles Segment Power Engineering Business
Volkswagen Passenger Cars Scania Vehicles & Services Power Engineering Dealer & Customer Financing
Audi MAN Commercial Vehicles Leasing
Skoda Direct Bank
SEAT Insurance
Bentley Fleet Management
Porsche Automotives Mobility Offerings
Volkswagen Commercial Vehicles
Other

 Company Overview & Activities

With 8 decades of business experience in the Automotive industry, today the group company is the 3rd
largest automaker in the world with a market cap of $97.81B billion, and also the largest automobile
manufacturer in the EU Region. The company operates across the different products and services,
and thus, addressing the entire automotive value chain. It operates nine independent brands with a
unique range of models with distinct personality, and also leveraging on synergies provided by
membership which has a global manufacturing base.
 The Automotive Division and the Financial Services Division

The Automotive Division comprises the Passengers Cars, Commercial Vehicles and Power
Business Units

Engineering business areas, and it comprise the development of vehicles and engines, the production
and sale of passenger cars, light commercial vehicles, trucks, business and motorcycles, as well as
genuine parts, large-bore diesel engines, turbomachinery, special gear units, propulsion components
and testing systems businesses.

The activities of the Financial Services Division comprise dealer and customer financing vehicle
leasing, direct banking and insurance activities, fleet management and mobility offerings.

The Passenger Cars brand unveiled its new brand design which is represented by the all-electric ID.3.
So, as the first model in the ID. Product line, the highly efficient and fully connected zero emissions car
is based on the Modular Electric Drive Toolkit (MEB).
Focus toward

Audi is consistently pursuing sustainable premium mobility which is electric-powered brand e-tron. The
e-mobility

all-electric SUV was rolled out in Europe, China, and the USA

The TRATON group consistently pursed its goal of becoming a global champion of the commercial
vehicle industry, and drive the transformation of the logistics sector. Its mission is to reinvent transport
for future generation through "Transforming Transportation"

The Chinese automotive market is centrally important to Volkswagen's electric campaign. With
intensive local development work and expansion of the product portfolio, the company wants to hold
strong position in the world's largest individual market

Key Event & Financial Highlights in 2019

The Volkswagen Group increased unit sales, sales revenue and profit in fiscal year 2019 amid a
persistently challenging market environment. The diesel issue resulted in special items that had an
adverse effect on profit.

The company group generated an operating profit before special items of Euro 19.3 (17.1) billion in
fiscal year 2019. Special items which resulted from the diesel issue weighed on the operating profit
amounting to Euro -2.3 billion.

12.9% Global
Market share
 Region wise growth story for 2019

Unit Sales by the Volkswagen Group rose to 11.0 (10.9) million vehicles in 2019 - a new record
despite a challenging and highly competitive market environment. Sales revenue rose by 7.1% to Euro
252.6 billion
Robust sales growth against

At 4.9 million vehicles, unit sales in the Europe/Other markets region were up 2.5% compared with the
previous year. Sales Revenue increased to Euro 154.0 (143.1) billion due to volume and mix effects
headwinds

In North America, the unit sales increased by 3.4 to 1.0 million Vehicles. Sales revenue amounted to
Euro 43.4 (37.7) billion, primarily due to the increase in volumes as well as positive exchange rate
effects.

South America, company sold 0.6 million vehicles in the reporting year. This was 1.9% more than in
the previous year. Despite unfavorable exchange rate trends, sales revenue improved by 8.6% to Euro
11.3 billion due to positive mix effects.

Asia-Pacific region, the unit sales - including those of the Chinese joint ventures - amounted to a total
of 4.5 (4.6) million vehicles. At Euro 44.0 (43.2) billion, sales revenue exceeded the previous year due
to improved mix and positive exchange rate effects.

Key Figures VEHICLE SALES SALES REVENUE

Thousand vehicles/€ million 2019 2018 2019 2018

Led by product launch and Europe/Other markets 4,856 4,739 153,999 143,089
brand spending North America 956 925 43,351 37,656
South America 607 596 11,297 10,405
Asia-Pacific 4,538 4,640 43,974 43,166
Hedges on sales revenue – – 11 1,535
Volkswagen Group 10,956 10,900 252,632 235,849

Revenue Trend at Glance (€ million) Key Figures by Brand

VEHICLE SALES SALES REVENUE

Revenue: 5-Year CAGR of 3.4% Thousand vehicles/€ million
Dec-19 Dec-18 Dec-19 Dec-18
260,000 8.0%
7.1% Volkswagen Passenger Cars 3,677 3,715 88,407 84,585
250,000 7.0% Audi 1,200 1,467 55,680 59,248
5.7% 6.0% SKODA 1,062 957 19,806 17,293
240,000
5.0% SEAT 667 608 11,496 10,202
230,000
2.7% 4.0% Bentley 12 10 2,092 1,548
220,000
3.0% Porsche Automotive 277 253 26,060 23,668
1.9%
210,000 Commercial Vehicles 456 469 11,473 11,875
1.2% 2.0%
200,000 1.0% Scania Vehicles and Services 101 97 13,934 12,981
190,000 0.0%
MAN Commercial Vehicles 143 137 12,663 12,104
Dec-15 Dec-16 Dec-17 Dec-18 Dec-19 Power Engineering - - 3,997 3,608
Other -685 -912 -30,931 -34,029
Revenue Growth % Change
Financial Services - - 37,957 32,764

Source: Annual Report

 FINANCIAL HIGHLIGHTS

Gross Profit (€ million) vs Margin % Automotive Division

55,000 21
19.7
Margin as % to Overall Revenue
50,000 19.5 19
18.9 19
36,000 14.0%
45,000 11.4% 11.8%
17 11.3%
40,000 31,000 12.0%
15.9
35,000 15 26,000 8.7% 10.0%
30,000 13 21,000 8.0%
25,000 11 16,000 6.0%
20,000 3.4%
9 11,000 4.0%
15,000
10,000 7 6,000 2.0%

5,000 5 1,000 0.0%

Dec-15 Dec-16 Dec-17 Dec-18 Dec-19 Dec-15 Dec-16 Dec-17 Dec-18 Dec-19

Gross profit Gross margin (%) EBITDA Margin %

Source: Annual Report

Automotive: ROI & Inventory Financial Services Division

12.1 Asset Growth Vs ROE

11 11.2
13.9

8.2 8.3 11.2

7.9
6

5.8 5.5 5.1 5 4.8

12.2 10.8 9.8 10.8

-0.2 9.9

Dec-15 Dec-16 Dec-17 Dec-18 Dec-19

Dec-15 Dec-16 Dec-17 Dec-18 Dec-19

Return on Investment Inventory turnover Return on Equity Growth in Total Assets

Source: Annual Report

Equity Ratio
36.9 37.9 37.6
32.6 31.4
FINANCIAL STABILITY,
STRENGTHEN AND DEGREE OF
11.9 12.5 13.7 12.7 12.8
INDEPENDENCE

23.1 22.7 25.8 25.6 25.3

Dec-15 Dec-16 Dec-17 Dec-18 Dec-19

Volkswagen Group Financial Services Division

Automotive Division
  ESG FACTORS: A WAY FORWARD FOR AUTO INDUSTRY
 Overview: The term ESG (acronym for Environment, Social, and Governance) is
increasingly getting popular and relevant in today’s fast changing society as
humankind aligns their needs with nature. It has evolved as a one of the key
variables in investment decisions among the millennial generation, and making
corporate giants accountable for decisions led by greed. 

ESG AUM The recent survey conducted by Morgan Stanley showed that about 90% of
millennials were interested in an ESG driven investment model to add long term
values. It is estimated that the Asset Under Management in ESG themes including
the ETFs globally stands at $ 40 trillion plus – which is expected to grow at CAGR for
15-20 per cent in 10 years.
RECENT
DEVELOPMENT The European Union also rolled out its ambition to bring down CO2 emission - with
the target of the fleet average set at 95 grams (CO2) per kilometer by 2021. The
European Commission also published ‘EU Taxonomy’ for sustainable activities –
which is expected to enable scale in investment, and financing green deals for
OPPORTUNITIES business growth.

The automotive industry is also in a transition phase to the reality of ESG factors -
with major/large companies aligning their business model towards more sustainable,
and eco-friendly. It now forms a critical variable in Credit Analysis with respect to
credit rating, and interest rate – as financial institutions too re-imagine financing.

Business Opportunities – Electric Vehicles, Hybrid Cars, Autonomous-Driving,

Energy Efficient Design, Shared Mobility

 ESG Activities in Volkswagen 


 It is first car manufacturer to commit to the targets of Paris Agreement on climate
change. By 2025 the company aim to reduce CO2 emission in their fleet by 30
percent, and become climate neutral by 2050. 

 Capacity to produce at reasonable cost with higher utility, and lower running cost.
The company developed a proprietary platform exclusively for electric driving - the
Euro 60 Billion Investment
Modular Electric Drive Toolkit (MEB). 

 Rollout first MEB model (the ID.3 & ID.4) in 2020 as part of its electric campaign.
Group brands Porsche & Audi successfully demostrated with the Taycan and e-tron
in electric mobility. 

 Mobilizing massive financial resources in next five years - worth Euro. 60 billion to
build future relevance of which Euro. 33 billion committed to earmarked for e-mobility
and over Euro. 14 billion for digitalization

 
ESG Activities in Volkswagen – cont.…

 Investment in new technologies to offer customer with highly efficient combustion

engines, hybrids and completely battery-electric drivers

CARBON-NEUTRAL PLEDGE  Priority to comply with the new CO2 fleet limits in the European Union while
maintaining the same level of profitability.

 To link top executives' bonuses to ESG targets as the automaker seeks to bolster
sustainability credentials that are increasingly relevant to investors.

 Pledged to become carbon-neutral by 2050 in a major strategy overhaul focused on

building the industry's largest fleet of electric cars.

Expenditure on Environmental Protection R&D Cost and Women Participation

250 25 R&D- Dec.2018 Dec.2019

21
245 Total research and development costs 13,640 14,306
20 of which capitalized development costs 5,234 5,171
240 17
Capitalization ratio in % 38.4 36.1
235 13 15
230 11
Sales revenue 201,067 212,473
244 9
225 10 Total research and development costs 13,640 14,306
220 230
233 R&D ratio % 6.8 6.7
227 5
223 (€ million)
215
Proportion of women – as of Dec 31 Dec.2018 Dec.2019
210 0
Dec-15 Dec-16 Dec-17 Dec-18 Dec-19
Employees 16.5 16.8
Senior management 9.1 9.7
Operating costs Investments
Top management 6.1 7.4
Source: Annual Report

Summary

The Volkswagen company is committed to focus its business activities and
performance measure through ESG driven metric to stay relevant in this evolving
trajectory. It has aggressively pushed its e-vehicle and carbon friendly cars since the
fallout of diesel issues 2015. The company incurred an expenditure worth $ 30 billion
ESG Pain so far in penalties, fees, rollback, and also leading to credit downgrade.

Despite the headwinds in the automotive industry, it continued to invest R&D cost
Gender Diversity yoy basis amounting to Euro. 13,360 million in 2019 which accounts for 6.8% of the
overall sales revenue. However, it has room to increase its share of R&D in the
R&D Spend range of 10-15% - which will help firms to navigate through new challenges.

The women workforce in Volkswagen is comparatively lower than the industry

average at 16.8% (VOW) against 20.2% (Industry) – and therefore, it has an
opportunity to scale the participation. The Top Management consist of 7.4% in 2019.
 ESG: KEY INDICATORS

Environmental Social Governance

Environmental Policy Full time Employees Gender diversity on Board
Environmental Impacts Monetary and Non-Monetary Benefits for employees Board - Independence
Energy Consumption Attrition Rate Board - Separation of Powers
Energy Intensity Training and development Hours Voting Results
Carbon/GHG Emissions Health care benefits Gender Pay Ratio
Primary Energy Source Human Rights Policy Incentivized Pay
Renewable Energy Human Rights Violations Business Ethics & Code of Conduct
Intensity
Water management Child & Forced Labor Supplier Code of Conduct
Waste Management Gender parity ratio at Workforce Bribery/Anti-Corruption Code
- Community and social Work Corporate Governance
- Local Procurement -

ESG: ENVIRONMENTAL ANALYSIS

Matrix
40% Key Weightage Score Remarks
Environmental Policy 6% 4.0% Company has laid wide range of
policy related to environment
Environmental Impacts 6% 2.0% The business has high impact on
environment
Energy Consumption 5% 1.5% 85-90% product-line requires energy
that has negative effect
Energy Intensity 4% 1.0% It is dependent on energy for the
business activity
Carbon/GHG Emissions 5% 1.5% Diesel issue continue to drag the
profitability
Primary Energy Source 3% 2.0% It requires derivatives of crude oil
Renewable Energy Intensity 5% 2.5% It has focus on e-vehicles & shared
mobility
Water management 3% 0.5% There are no activities in record
Waste Management 3% 0.5% There are no activities in record
Total 40% 15.5%
 ESG: SOCIAL ANALYSIS

Matrix
30% Key Weightage Score Remarks
Full time Employees 3% 2.7% The company has over 670,000 employees
Monetary and Non-Monetary 3% 2.5% It has linked to ESG based assessment
Benefits
Attrition Rate 2% 1.0% Assumption
Training and development 4% 3.5% The company spends consistently on R&D including
Hours training
Health care benefits 3% 1.5% Assumption
Human Rights Policy 3% 1.0% Assumption
Human Rights Violations 2% 1.0% Assumption
Child & Forced Labor 2% 1.0% Assumption
Gender parity ratio at Workforce 3% 1.5% The women ratio is less than 20%
Community and social Work 3% 2.0% Consistent investment in environmental protection
Local Procurement 2% 1.5% Robust third party related process
Total 30% 19.2%

ESG: GOVERNANCE ANALYSIS

Matrix
30% Key Weightage Score Remarks
Gender diversity on Board 4.0% 3.1% The women consist of 7.4% on Board
Board - Independence 3.5% 3.0% The board functions separately
Board - Separation of Powers 2.5% 1.0% There is no defined power
Voting Results 4.0% 2.0% Assumption
Gender Pay Ratio 3.0% 1.5% Assumption
Incentivized Pay 3.0% 2.5% Performance based on ESG
Business Ethics and Code of Conduct 2.0% 1.5% Company has put in place various measures
Supplier Code of Conduct 2.0% 1.5% It is included in Third Party Related
Bribery/Anti-Corruption Code 3.0% 1.5% No data available as such
Corporate Governance 3.0% 1.0% The diesel issue continues impact confidence
30% 18.6%

ESG Factors Score Weight VOW Score Rating Matrix

Environmental 40% 15.5% 100-80% Leader
Social 30% 19.2% 60-79% Visionary
RATING: “LEARNER”
Governance 30% 18.6% 30-59% Learner
Total 100% 53%  Below 29% Laggard 


 

 Performance Analysis
Volkswagen scored 53% in ESG rating model – which indicates an overall rating of
‘Learner’ in terms of its commitment towards non-financial performance. Thus, it is
evolving gradually to re-align itself towards the reality of industry revolution. The
53% ESG SCORE issues related to diesel have consistently undermined their effort in green business
including the core activities which have impacted financial performance. There is
also a lack of confidence leading to downgrade in corporate governance.
Nevertheless, the company has potential to turnaround with its accumulated
resources and improve their position in ESG rating. 

 It has a capacity to produce the vehicles at reasonable cost with higher utility, and
also stay committed to the long-term goal of being carbon neutral by 2050. Further,
the development of proprietary platforms exclusively for electric driving will
strengthen ESG’s future position. 
BUSINESS STRENGTH IN ESG

 Strong Balance Sheet and substantial cash position with conservatively financed
capital structure, it has a high degree of financial flexibility. It can also capitalize on
green bond financing with relatively lower interest rate to finance future projects in e-
vehicle.

 It has a diversified global market share which reduces the reliance on one regional
economy, and ensures mass rollout of environment friendly product-line in future
under different categories. This will ensure stability in financial position and
independence.

 With independent multiband in portfolio, it offers synergies across the value chain,
and to leverage on common superior technology know-how to build robust product-
line with regional theme.

 The company continues to get negatively impacted by the past governance issues –
leading to drag in financial performance coupled with disintegration in management
confidence among investors.
WEAKNESS IN ESG

 The R&D spending as a percentage of revenue is still lower than 10% against the
industry average, indicating slower decision making process for new business
opportunities. 
 Ownership of German Government in Volkswagen business leads to overhang or
blocking of major decisions, which impacts operational activities to achieve goal
related to green business.
 The company has remained conservative or late to lead towards new opportunity
financing, and leading to delay in innovative business opportunities.
 Delay in product rollout under electric vehicle segment compared to competition.
  Recommendation 

Volkswagen should continue to focus on Five Modules of “Together 2025+” strategy

which will create focused & streamlined corporate structure to manage multiple brands
more efficiently. It will enable group companies to leverage synergies and accelerate
decision-making processes with less intervention from the government.

The government stake should strategically be divesting to minimize the delay in

decisions that are needed to stay relevant in changing market dynamics. It will
sustainable increase the enterprise value through increased efficiency, productivity, and
profitability.

Increasing the expenditure coupled with strategic investment in R&D to develop and train
resources in evolving technology in the mobility domain. And stay focus on realigning the
brand portfolio to capture intrinsic value.

The diesel issue continues to put questions over corporate governance. Thus, it needs to
systematically invest in brand value, create more social awareness on commitment to
remain carbon neutral, and avoid venturing into questionable projects.

Apart from performance incentives based on ESG, there is also a need for leadership to
remain more open towards transformation through partnership-based working models
among different brand leadership.

Lastly, it shouldlearn to coexist with the traditional model vs the disrupted model in the
auto industryto create long term value across the supply chain. This will enable
companies toreach the 2050 goal of making carbon neutral cars.

Volkswagen is the third largest automotive company in the world by market capitalization
which stands at Euro. 81.98 billion. It has multi successful auto brands in its portfolio with
a unique proposition of its own. The business activity is spread across diverse economic
regions - which offers different revenue sources for the company. It has worked
consistently to streamline corporate governance structure after the diesel fiasco to regain
CONCLUSION the confidence of investors. The board and management unveiled medium to long term
goals for the company/brands – to work towards more energy efficient vehicles with
minimal to nil impact on the environment. It has the capacity to deliver on the pledge
through synergies offered across the verticals.

Despite the negative sentiment since 2015, the company managed to consistently
perform both financially and socially. Further, the industry headwinds didn’t put pressure
on performance of the company as it continued to expand its operating margin a period.
The change in the automotive industry in the 21st century provides exciting opportunities
to makeover on the lost ground, and lead as an example in the automotive industry.

Tshering Wangchuk, 9004140466, Disclaimer: Self-Assessment Report Only