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Volkswagen's $15 billion lesson on the stakes of sustainability

The public backlash has already been swift, but the concrete financial toll of European automotive giant Volkswagen's deliberate manipulation of diesel emission testing revealed last fall is starting to crystallize.

A $14.7 billion settlement announced yesterday for the owners of some 475,000 impacted U.S. cars. The company, once lauded for its sustainability efforts on corporate rankings like the Dow Jones Sustainability Indices, is now No. 2 on the dubious list of the costliest corporate environmental misdeeds in history behind BP's $20 billion Gulf Oil Spill payout finalized last year.

In addition to the very visible green marketing fall from grace for allegedly "clean" diesel cars, the 11-figure financial penalty reflects a new precedent for regulatory crackdowns — and this is all in the U.S. alone, to say nothing of what regulators elsewhere may do about the 10 million-plus other vehicles impacted worldwide.

It’s time Volkswagen focuses on building clean electric vehicles.

The verdict, which came after California regulators earlier this spring rebuffed a less costly Volkswagen plan to recall vehicles impacted by the emissions scandal, illustrates how much higher the stakes of reining in pollution have become for corporate America.

For those already immersed in corporate sustainability, however, the entire situation raises a counter-intuitive question: Could the regulatory hammer dropped on VW actually be a good thing for environmentalists?

"The risk of such a mistake provides leverage to people inside corporations attempting to bring the physical dimensions of sustainability into routine corporate decision-making," Steven Cohen, executive director of Columbia University's Earth Institute, wrote in a Huffington Post column. "This includes careful consideration of the environmental impacts of the company’s production processes and products."

Market shift in the making?

In addition to bolstering the business case of in-house sustainability experts, the Volkswagen case provides a crash course in how much major environmental scandals can disrupt entire industries.

VW will have to pay for up to $10 billion to the owners of affected cars, who will have the option to either have the emissions issue fixed — potentially lowering gas mileage and altering acceleration — or sell the car back to the manufacturer at pre-scandal market value.

Additional cash compensation will range from $5,100 to $10,000, depending on the condition of the car at the time VW's "defeat device" designed to trick regulators into approving emissions levels was first discovered last year.

The Volkswagen case provides a crash course in how much major environmental scandals can disrupt entire industries.

“It’s hard to see why consumers would want to take advantage of the fix and not the buyback option, unless they just love their cars,” David Uhlmann, former head of the Justice Department’s Environmental Crimes Section and University of Michigan law professor, told the New York Times. “For Volkswagen, it’s an extremely expensive settlement, far more than many analysts predicted."

Perhaps more interesting, though, is that the settlement also dictates that Volkswagen will pay the Environmental Protection Agency $2.7 billion to compensate for previously unknown contributions to climate change. And, in a recommendation straight from environmental advocacy groups including the Sierra Club, the company committed to investing $2 billion in new clean car development.

"It’s time Volkswagen focuses on building clean electric vehicles," Sierra Club California Chapter Director Kathryn Phillips said in a statement after the previously proposed settlement was rejected in March.

Just before the accepted settlement was announced, Volkswagen CEO Matthias Muelle said that the company is now aiming to launch 30 all-electric models by 2025 as part of a plan to sell 2-3 million EVs per year by that date. Those figures, if realized, would account for 20-25 percent of the company's 10 million annual car sales.

Given the seismic shifts occuring elsewhere in the automotive world — namely, ridesharing services threatening market share for personal vehicles and alternative powertrains like EVs changing the game in other ways — it's no stretch to say that even a massive incumbent like Volkswagen's survival may depend on its ability to adapt to the new sustainability status quo.

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