The Test Bug: How do you solve a problem like Herbie?

4 October 2015

Sarah Wilson

EU regulation

Those of us familiar with Disney's "Herbie" film series were perhaps not at all surprised at the recent travails to have hit VW. After all, if their cars can be intelligent enough to compete on their own in rally-car races, surely rigging the odd emissions test or two would be simple to do?

Back in the real world, it would appear that #VWGate, its effect the very stuff of investor nightmares, has again triggered a flurry of "we told you so" or "this is what needs to be done". In fact, we think the affair again underlines a darker, cynical aspect to the well-worn saying "what gets measured gets managed" (William Thomas, Lord Kelvin, 1883).

Much argument is being had on both the measurement and the management shortcomings that enabled VW (and possibly others yet to be outed?) to continue the charade of passing emissions tests thanks to software designed to cheat. The race to demonstrate how it could be avoided in future seems to have subsumed a more fundamental debate about whether we understand the levers of control. Do we really need more tests? Do we actually need more boards? Surely it's quality, not quantity that counts. Data doesn't lie, but it does need to be carefully understood so that we're not put off the scent by "garbage in, garbage out". And that means taking time to analyse data properly.

At Manifest, we turned to the idea of whether it might be true to say "what doesn't get measured goes unmanaged"? We took a "deep-drive" around our own analysis of sustainability governance in the automobile sector. Manifest's Say on Sustainability analyses assess company reporting (ergo management?) of a range of important sustainability risk themes including environment, human capital, health and safety, ethics, management policy and company targets.

20150924 car companies environmental risks detailed

The results are intriguing as a potential road map for the post-VW inquisitive mind - not least with VW coming top in the "ethics-factor risk" category (meaning they identified more ethics factor risks in their reporting than their peers - but were they the right ones?), and Tesla - the environmentalists choice car maker (if that exists!) - coming bottom of the pile when it comes to reporting of sustainability governance (but they're alright, they make electric cars, yeah?). Also interesting is the comparatively low number of environmental risk factors listed by Japanese manufacturers, as well as the highly regimented reporting regime under which French manufacturers operate - is it flexible enough effectively keep up with the pace of scientific evolution?

Our research certainly supports the notion of importance of quality over quantity, as well as the need for good, clean data and analysis to help investors unearth tomorrow's #VWgate before it becomes the next investor nightmare. This is a critically important point to remember in the midst of one of the most material "extra-financial" risk stories of the decade.

So, whether or not Herbie goes to hell in a handcart, take a step back, consider the information we have, and use it to ask: "what's missing?"

With the possibility of further accusations of short-cutting and test re-evaluations rippling throughout the sector, never has the materiality of sustainability been placed more front and centre of investor thinking; let's make sure we understand it properly by looking at the dark as well as the light spots.

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