After the Volkswagen emissions scandal, why should we trust companies to protect the environment?
The world’s largest automaker has just given more ammunition to those who don’t trust that businesses are serious about preventing runaway climate change.
How ironic that Volkswagen, which has publicly signed a pledge to be a leader in “consistent, positive business engagement with policymakers on climate issues,” should be caught by the Environmental Protection Agency for allegedly cheating on emission-control standards.
Martin Winterkorn, Volkswagen’s CEO, apologized on Sunday after the EPA accused the company of installing software in its diesel-powered vehicles specifically designed to allow the cars to evade regulators and emit 40 times the legal limit of nitrogen oxide. The chemical adds to the buildup of smog, which is tied to asthma and other respiratory illnesses.
The impact of one pound of N2O on warming the atmosphere is almost 300 times that of one pound of carbon dioxide.
In a statement, Winterkorn said that “I personally am deeply sorry that we have broken the trust of our customers and the public,” and ordered an external investigation.
This was equivalent to putting his finger in a bursting dam, given that the German company could face penalties of up to $18 billion for allegedly installing the illegal “defeat devices” to falsify emissions tests. Volkswagen shares plummeted on the Frankfurt DAX index in response to the news.
Apart from saving the reputation of his company, Winterkorn should also think about the damage he has done to the corporate sustainability movement. Volkswagen’s actions will fuel the cynics who believe businesses are just paying lip service when it comes to issues like climate change and resource scarcity.
This is a particularly poignant moment for such reflection, given scores of companies are converging on New York over the next few days to join Volkswagen in making commitments during Climate Week to creating a low-carbon economy.
What the Volkswagen scandal illustrates is that profit maximization is so deeply embedded in corporate culture that when push comes to shove, the vast majority of companies will put the bottom line above any moral case for change, and sometimes even cheat to keep the short-term profits coming in.
The only way this is going to change is if companies create a revolution in the way that staff are incentivized. If businesses really believe climate change is a serious issue, they need to stop paying their staff purely on the basis of meeting their quarterly targets.
It is true that a small but growing number of companies are starting to incorporate sustainability performance into their executive compensation packages, but these often represent a tiny percentage of overall pay and therefore are unlikely to change behavior.
Research by Wayne Guay, professor of accounting at the University of Pennsylvania’s Wharton School of Business, found that for those companies that do incorporate sustainability targets, this normally makes up less than 1 percent of overall pay.
A study by Ceres, a nonprofit focused on sustainable business and climate action, found that in 613 of the nation’s largest publicly traded companies, fewer than a third had boards of directors formally overseeing sustainability performance. And just 19 companies, or 3 percent, related compensation directly to voluntary sustainability performance targets such as greenhouse gas emissions reductions.
Ceres points to Alcoa, one of the world’s largest producers of aluminum, as a leader in the field. A fifth of Alcoa’s executive cash compensation is tied to safety, diversity goals and environmental stewardship, including greenhouse gas reductions and energy efficiency.
Our current form of capitalism has been around long enough for us to know the simple truth that people will act in accordance with how you assess their performance. If Volkswagen had spent the necessary time and energy to drive sustainability deep into the corporate culture, and linked this in a significant way to executive performance, it may have avoided the disaster it now faces.
Other companies looking on would also do well to note that as we move into a more carbon-constrained era, they ignore climate change at their peril.