Environmental and social risks

For this risk category, the likelihood of occurrence is classified as medium (previous year: medium) and the potential extent of damage is classified as medium (previous year: medium).

The most significant risks from the regular GRC process and QRP arise from non-fulfillment of CO₂-related requirements.

Personnel risks

We counter economic risks as well as changes in the market and the competitive situation with a range of instruments that help the Volkswagen Group to remain flexible in terms of staff deployment when faced with a fluctuating order situation – whether orders are in decline, or there is an increase in demand for our products. These instruments include time accounts to which hours are added when overtime is necessary and from which hours are deducted in quiet periods, enabling our factories to adjust their capacity to production volume with measures such as extra shifts, closure days and flexible shift models. The use of temporary workers also allows us to be more flexible in our planning. All of these measures help the Volkswagen Group to generally maintain a stable permanent workforce, even when orders fluctuate.

The technical expertise and individual commitment of employees are indispensable prerequisites for the success of the Volkswagen Group. We counter the risk of not being able to develop sufficient expertise in the Company’s different vocational groups with our strategically oriented and holistic human resource development, which gives all employees attractive training and development opportunities. By boosting our training programs, particularly at our international locations, we are able to adequately address the challenges of technological change.

To counter the potential risk of a shortage of skilled specialists – especially in the areas of digitalization and IT – we continuously expand our recruitment tools. Our systematic talent relationship management, for example, enables us to make contact with talented candidates from strategically relevant target groups at an early stage and to build a long-term relationship between them and the Group. In addition to the standard dual vocational training, programs such as our StIP integrated degree and traineeship scheme and our Faculty 73 ensure a pipeline of highly qualified and motivated employees. By systematically increasing our attractiveness as an employer, we are able to gain talented people in areas that are crucial for the future, such as electrical engineering, chemistry or information technology. With tools such as these, we want to ensure that our demand for qualified new staff is covered, even amid a shortage of skilled labor.

We counter the risks associated with employee fluctuation and loss of knowledge as a result of retirement with intensive, department-specific succession planning and training. We have also established a base of senior experts in the Group. With this instrument, we use the valuable knowledge of our experienced specialists who have retired from Volkswagen.

The advancing digitalization of our human resources processes entails risks arising from the processing of personal data. Volkswagen is aware of its responsibility in the processing of this data. We address these risks as part of our data protection management system by implementing a wide range of measures.

A challenge lies in the conflict between requests for information in the context of various US agreements entered into in connection with the diesel issue on the one hand and both German and international data protection requirements on the other. This is true particularly in view of the fact that these data protection requirements are open to a certain degree of interpretation and assessment. In the interest of precluding infringements of the law as far as possible, despite a partially unclear legal situation, Volkswagen is advised by external law firms on these issues.

The spread of the SARS-CoV-2 virus had a negative impact on business development in fiscal year 2020. Any infectious diseases occurring in the future may also pose a risk of high infection rates among the workforce, resulting in process disruptions in production and non-production areas, for example production stoppages. In the event of the future spread of such diseases, emergency plans to tackle this risk for the purpose of business continuity management will be developed for critical processes, based on the experience of 2020, and incorporated into the risk management systems.

Environmental protection regulations

The specific emission targets for all new passenger car and light commercial vehicle fleets for brands and groups in the EU for 2020 and subsequent years are set out in Regulation (EU) No 2019/631. This regulation is a material component of the European climate protection policy and therefore forms the key regulatory framework for product design and marketing by all vehicle manufacturers selling in the European market.

Adopted by the EU on April 17, 2019 and published on April 25, 2019, the regulation states that, from 2021 onward, the average emissions of European passenger car fleets must be no higher than 95 g CO₂/km; in 2020, this emissions limit already applied to 95% of the fleet. Up to and including 2020, European fleet legislation was complied with on the basis of the New European Driving Cycle (NEDC). From 2021, the NEDC target value will be replaced by a WLTP target value through a process defined by lawmakers; this change will not lead to additional tightening of the target value. A similar approach will apply to light commercial vehicles, where a target of 147 g CO₂/km applied to the entire fleet in 2020.

The targets will be tightened as from 2025: for new European passenger car fleets, a reduction of 15% will therefore be required from 2025 and a reduction of 37.5% from 2030. For new light commercial vehicle fleets, the required reductions will be 15% from 2025 and 31% from 2030. In each case, the starting point is the fleet value in 2021. These targets can only be achieved through a high proportion of electric vehicles within the fleet.

Non-fulfillment of the respective fleet-wide target will result in an excess emissions premium, amounting to €95 per excess gram of CO₂ per newly registered vehicle.

At the same time, regulations governing fleet fuel consumption are also being developed or introduced outside the EU27 (plus Norway, Iceland), for example in Brazil, Canada, China, India, Japan, Mexico, Saudi Arabia, South Korea, Switzerland, Taiwan, the United Kingdom and the USA. Brazil has introduced a fleet efficiency target as part of a voluntary program which grants tax advantages. To receive a 30% tax advantage, manufacturers must, among other things, achieve a specified fleet efficiency. The fuel consumption regulations in China, which set an average fleet target of 5.0 liters/100 km (NEDC) for the period 2016 to 2020, were continued into the period 2021 to 2025 with a target of 4.6 liters/100 km (WLTP). In addition to this legislation on fleet fuel consumption, a new energy vehicle quota applies in China. This requires every manufacturer to increase the share of electric vehicles – which are included with different weightings – in its total sales. The quota for 2020 was 12%, to be fulfilled through battery-electric vehicles, plug-in hybrids, or fuel cell vehicles. The minimum quota will increase by two percentage points annually until 2023. Targets for the period after 2023 have not yet been defined. In the USA, greenhouse gas legislation has defined the annual CO₂ fleet targets since 2012. A decision was reached in fiscal year 2020 to relax fleet targets significantly starting in 2022. The Volkswagen Group decided to participate in the framework of the California Air Resources Board (CARB). This involves a voluntary commitment to the alternative fleet targets set by the CARB which are more ambitious than the national standards. The form the fleet targets will take under the new administration is not known.

The increased regulation of fleet-based CO₂ emissions and fuel consumption makes it necessary to use the latest mobility technologies in all key markets worldwide. At the same time, electrified and also purely electric drives will become increasingly common. The Volkswagen Group closely coordinates technology and product planning with its brands so as to avoid breaches of fleet values, since these would entail severe payment obligations. Whether the Group meets its fleet targets depends crucially on its technological and financial capabilities, which are reflected in, for example, our drivetrain and fuel strategy. Volkswagen continues to regard diesel technology as an important element in the fulfillment of CO₂ emissions targets.

Alongside technical and portfolio electrification measures, it is also possible to use local statutory mechanisms such as the creation of emission pools in Europe or the trading of emission credits in the United States and China. Legislation provides further flexibility to aid target achievement, depending on the region, for example:

• Relief opportunities may be provided for additional innovative technologies in the vehicle that apply outside the test cycle (eco-innovations and off-cycle credits),
• Particularly efficient vehicles qualify for super-credits,
• Special rules are in place for small-series producers and niche manufacturers.

In the EU, a more time-consuming test procedure has applied to all new vehicles with WLTP since September 2018. Other challenges arise in connection with stricter processes and requirements regarding WLTP, such as from test criteria and homologation (achievement of vehicle type approvals).

The Real Driving Emissions (RDE) Regulation for passenger cars and light commercial vehicles is another of the main European regulations. New, uniform limits for nitrogen oxide and particulate emissions in real road traffic have applied to new vehicle types across the EU since September 2017. This makes the RDE test procedure fundamentally different from the Euro 6 standard still in force, which stipulates that the limits on the chassis dynamometer are authoritative. The RDE regulation is intended primarily to improve air quality in urban areas and areas close to traffic, leading to stricter requirements for exhaust gas aftertreatment in passenger cars and light commercial vehicles. Stricter RDE processes and requirements have resulted in certain challenges, for example relating to test criteria and homologation.

The other main EU regulations affecting the automotive industry include:

• The Car Labeling Directive 1999/94/EC,
• The Fuel Quality Directive (FQD) 2009/30/EC updating the fuel quality specifications and introducing energy efficiency specifications for fuel production,
• The Renewable Energy Directive (RED) (2009/28/EC) introducing sustainability criteria; the follow-up regulation (RED2) contains higher quotas for advanced biofuels,
• The revised Energy Taxation Directive 2003/96/EC updating the minimum tax rates for all energy products and power.

Commercial vehicles are increasingly subject to ever stricter environmental regulations all around the world, particularly to regulations relating to climate change and vehicle emissions. With Regulation (EU) 2019/1242 of June 20, 2019, which specifies CO₂ emission standards for new heavy trucks with a permitted gross weight of over 16 tonnes, the EU has set heavy commercial vehicle manufacturers very ambitious targets for reducing CO₂ emissions within the next decade. The CO₂ emissions from such vehicles must be reduced by 15% by 2025 and 30% by 2030 compared to a reference value for a monitoring period from July 2019 to June 2020. If they fail to meet these targets, vehicle manufacturers will be liable to substantial excess emissions premiums, amounting to €4,250 per excess gram of CO₂/tonne-kilometer (tkm) per vehicle for the period from 2025 to 2029 and €6,800 per excess gram of CO₂/tkm per vehicle for the period from 2030 onward.

Compliance with regulations relating to climate change and vehicle emissions requires substantial investment in new technologies, including alternative drive systems and vehicles powered by alternative fuels. Increasing connectivity within transport networks can help to reduce inefficiencies such as unused transport capacity, empty runs and inefficient routes in existing transport networks. In conjunction with connected traffic management systems, this can result in optimized goods transport and therefore a reduction in CO₂ emissions.

As part of the European Green Deal, the European Commission has presented its 2030 Climate Target Plan, which sets out to reduce CO₂ emissions in the EU by at least 55% (previously 40%) compared to 1990 levels by 2030. This may lead to even more stringent requirements for CO₂ emissions for the automotive industry.

There is particular momentum in the debate on driving bans for diesel vehicles in Germany. This was triggered by the failure of some municipalities and cities to comply with the air pollutant limits for nitrogen dioxide (NO₂) immissions. In some cases, these issues have been, and continue to be, the subject of legal proceedings. Individual cities throughout Germany have already imposed zonal traffic bans for older vehicles such as Euro 4/IV diesel. It is argued that only driving bans for diesel vehicles can bring about the necessary short-term reduction in NO₂ immissions. The discussion may result in sales volumes of diesel vehicles declining further and financial liabilities arising from customer-related measures and potential official or statutory requirements.

Local traffic bans are already also in place in a number of other countries, though these mainly affect older vehicles. Regulations in Belgium that successively ban older vehicles from larger cities are one example. In addition to major cities such as Paris and London, countries like the United Kingdom are now discussing future bans on vehicles with internal combustion engines.

In the Power Engineering segment, the International Maritime Organization (IMO) has introduced the International Convention for the Prevention of Pollution from Ships (MARine POLlution – MARPOL), with which limits on emissions from marine engines will be lowered in phases. A reduction of the sulfur content in marine fuel was implemented globally with effect from January 1, 2020. In addition, the IMO has decided on a number of emission control areas in Europe and the USA/Canada that will be subject to particularly stringent environmental regulations. Expansion to further regions such as the Mediterranean or Japan is already being planned; other regions such as the Black Sea, Alaska, Australia or South Korea are also in discussion. Moreover, emission limits are in force under Regulation (EU) 2016/1628 and in accordance with the regulations of the US Environmental Protection Agency (EPA), for example. We are pushing for a maritime energy transition in specialist bodies and also promote this to the general public. In a first step, we are supporting the switch to liquefied natural gas (LNG) as a fuel for maritime applications, and offer dual fuel and gas-powered engines for new and retrofitted vessels. For the long-term and climate-neutral operation of seagoing vessels, we advocate power-to-X technology, in which excess sustainably generated electricity is converted into carbon-neutral gas or liquid fuel.

As regards stationary equipment, there are a number of national rules in place worldwide that limit permitted emissions. On December 18, 2008, the World Bank Group set limits for gas and diesel engines in its Environmental, Health, and Safety Guidelines for Thermal Power Plants, which are required to be applied in countries that have adopted no national requirements of their own, or requirements that are less strict than those of the World Bank Group. These guidelines are currently being revised. In addition, the United Nations adopted the Convention on Long-range Transboundary Air Pollution back in 1979, setting limits on total emissions as well as nitrogen oxide for the signatory states (including all EU states, other countries in Eastern Europe, the USA and Canada). Enhancements to the product portfolio in the Power Engineering segment focus on improving the efficiency of equipment and systems.

The allocation method for emissions certificates changed fundamentally when the third emissions trading period (2013 to 2020) began. As a general rule, all emission allowances for power generators have been sold at auction since 2013. For the manufacturing industry and certain power generation installations (e.g. combined heat and power installations), a portion of the certificates is allocated free of charge on the basis of benchmarks applicable throughout the EU. This portion of free certificates will gradually decrease as the trading period progresses; the remaining quantities required will have to be bought at auction. In certain (sub)sectors of industry, there was a risk that production will be transferred to countries outside Europe due to the amended provisions governing emissions trading, a phenomenon referred to as carbon leakage. A consistent quantity of certificates was allocated to these sectors free of charge for the period from 2013 to 2020 on the basis of the pan-EU benchmarks. The automotive industry was included in the carbon leakage list that came into effect in 2015. As a result, individual facilities at Volkswagen Group locations in Europe received additional certificates free of charge up to the end of the third trading period. Back in 2013, the European Commission decided to initially withhold a portion of the certificates to be auctioned. The certificates were directed into a market stability reserve that was established in 2018. This reserve will serve to offset any imbalance between the supply of and demand for certificates in emissions trading in the fourth trading period (from 2021). Moreover, there are further modifications in emissions trading as from the beginning of the fourth trading period, which may lead in total to a tightening of the system and thus to price increases for the certificates.

In addition to the EU member states, other countries in which the Volkswagen Group has production sites are also considering introducing an emissions trading system. In China, for example, eight corresponding pilot projects are underway. These do not yet affect the Volkswagen Group. The Chinese government officially implemented a national emissions trading system at the end of 2017. Initially, this affects only the power generation sector; a gradual expansion is being planned.