One Eye Blind: Lessons on Reputational Risk

It starts out sounding like good news: global leaders in the Automotive industry are guided by and have published for several years reports that reference GRI’s Sustainability Reporting Guidelines¹.

These guidelines are the most important international standard in use for organizations committed to accounting for business activities and performance relevant to sustainability. For companies adhering to this framework, a main internal benefit is the increased understanding of sustainability risks relevant to their core business. GRI speaks of “materiality” in this context.

Nonetheless, the same Automotive organizations (namely German auto giants, Daimler, Volkswagen and BMW) have been stuck for almost 3 years now in a reputational and broader legal ordeal that became known as “Dieselgate”.

This now well-known scandal has resulted in legal proceedings and compensation claims of billions of Euro, spurring bans for diesel vehicles in metropolises such as Hamburg and, most recently, the Germany-wide recall of 238,000 Daimler vehicles in July because of manipulated software for the emissions control.

The price is high

Reputational risk can cause instant losses in share value, stakeholder trust and customer loyalty. Instant amplification with social media has tremendously increased the value of intangible assets, such as brand equity and goodwill. For most organizations, post-crisis reputational damage lasts longer than a year². Volkswagen’s damage from “Dieselgate” in reputational and financial fallout was enormous. Since 2015, the car manufacturer has paid more than $32 billion in fines and penalties and has worked hard to earn back the trust of Volkswagen owners and industry regulators.

No question, the case of manipulated software together with respective responsibility of top management is subject to legal clarification. But beside this, there is also the question: why are so many auto manufacturers (not just those under the manipulation suspect) now struggling with negative business impact of marred reputation? This seems contradictory to their mature sustainability profile – and indicates “blind spots” in sustainability risks assessment and reporting.

According to the GRI standard, essential topics concerning sustainability need to be subject of defining key figures, problem analysis, solution approach, progress report and performance measurements. ‘Blind spots’ can result from misaligned priorities.

The answer to “What is essential” is answered differently from citizens and businesses, as a recent analysis of almost 500 UK businesses operating 17 countries claims³. This misalignment could pose an issue for those businesses wanting to strengthen their brand and reputation with consumers, the research warns. Reflecting on the automotive example, not one of the larger auto producers had set robust quantitative KPIs on air pollution and its inherent negative impact on human health, turning a ‘blind eye’ to what would become the inflection point of their current crisis.

What’s the solution?

Successful reputational risk mitigation strategies depend on assessments that allow for a maximum visibility on the organizations potential impacts on society. An external point of view will help to avoid the ‘blind spot’ situation, corporate-NGO partnerships are a common practice to help organizations better understand their social impacts and related risks.

Other recommendations include:

• Engage in collaborative approaches to supplier benchmarking and risk identification through platforms like EcoVadis or through industry alliances like the Sustainable Apparel Coalition, Automotive Industry Action Group, or other networks.
• Disclose to CDP, including forward-scenario analysis and low-carbon transition plans. Also consider developing science-based targets (SBTs)
• Collaborate with peers to put measures or safeguards in place that set new industry standards for accountability. The Responsible Business Alliance provides a collaborative forum for these efforts.
• Work closely with communications teams to ensure that company commitments and achievements in sustainability are readily and widely shared with stakeholders.
• Make public commitments to accountability, such as joining the RE100 to source 100% renewable electricity, or the CE100 to operate using circular business practices.

Millennial consumers and other socially conscious demographics demand greater accountability, which means reputational risk will only grow in the coming years. Greater visibility on reputation risks and a robust mitigation strategy are the ticket to play in today’s and tomorrow’s economy.

And against some critics there is no need to plan for the unknown. Today’s methodologies and expertise contain well-grounded projections of future impacts of our todays decisions.

Consider one last time the automotive example: the “Dieselgate” did not occur from any surprising, hidden interdependency within the supply chain. The case was discussed and proven by measurements years before going viral with the massive business damages.  It’s a matter of focus and strategy to understand that society will ask for and react on any organization’s impact on sustainability.

1. Global Reporting Initiative (GRI) is an independent international organization on sustainability reporting

2.  A crisis of confidence, Deloitte

3. Business Reporting on SDGs; PWC