Volkswagen cut from top sustainability index

Dow Jones sustainable index drops Volkswagen

Volkswagen will be dropped from a leading sustainability index next month in the wake of an emissions scandal that has wiped billions off the automaker's value.

Once the darling of fuel efficient automakers, Volkswagen will be removed from the Dow Jones Sustainability Indices (DJSI) as of October 6, a press release from index organizers RobecoSAM and S&P Dow Jones Indices said Tuesday.

A review of Volkswagen's standing on the index was sparked by news that Volkswagen had manipulated emissions tests of its diesel-powered vehicles.

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Volkswagen is said to have installed sophisticated software known as "defeat devices" that only turned on full emissions controls when it sensed official testing taking place, but otherwise emitted 10 to 40 times the legal amount while on the road. The issue was first brought to light by the Environmental Protection Agency earlier this month, based on tests from West Virginia University.

It prompted an executive reshuffle that saw former CEO Martin Winterkorn resign, and Porsche boss Matthias Mueller step into his shoes late last week. In a company statement following his appointment, Mueller said his "most urgent" task would be to win back trust for VW, promising "maximum transparency."

Volkswagen was part of the DJSI's global listing for 13 years — between 1999 and 2004, and again from 2007 to 2015 — and earlier this month was named the most sustainable automaker amongst its indexed peers.

Volkswagen's press team had no comment on news of the exclusion.

The end of sustainability rankings?

Some critics say sustainability rankings risk losing credibility as a result of the Volkswagen debacle.

Linda Greer is a director at the U.S.-based environmental advocacy group Natural Resources Defense Council (NRDC). She says the Volkswagen scandal will severely tarnish the entire corporate social responsibility movement and "may take a few environmental certification and sustainability ranking systems down with it."

She told CNBC via email that rankings like the DJSI and Global Reporting Initiative rely too heavily on self-reporting and too little on independent environmental assessments.

"There has been relatively little critical assessment of these systems, though when incidents like the Volkswagen incident, and the BP oil spill, there is a brief period of arm-waving to draw attention to the limitations of these often poorly focused and biased assessments," Greer said.

An activist holds up a sign reading 'Stop Lying' (Schluss mit Luegen) during a protest of environmental watchdog Greenpeace in front of the headquarters of German car maker Volkswagen in Wolfsburg, central Germany, on September 25, 2015.
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The DJSI itself weighs sustainability criteria partly through a Corporate Sustainability Assessment (CSA), comprised of an online questionnaire assessing economic, social and environmental issues, checked against supporting documents, RobecoSAM's told CNBC. Deloitte also conducts an external audit of the assessment process each year.

But Greer said some of the DJSI's questions were far too trivial.

"Much of the questioning in the scoring systems concerns itself with what sorts of management structures are in place, or what certifications have been received, rather than focusing on bottom-line environmental impact," Greer said.

"These questions crowd out the much smaller number of questions that focus on actual environmental performance … It should be a core component and one that should be prioritized," she added.

Matthias Mueller, CEO of Porsche AG attends the Porsche AG annual press conference on March 2015 in Stuttgart, Germany.
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The DJSI also measures its members through Media & Stakeholder Analysis (MSA), which takes stakeholder information and press coverage of the company into account to evaluate how companies have responded to critical sustainability issues.

Volkswagen was chucked out of the DJSI rankings for failing to meet this MSA criteria after the emissions scandal broke.

Brazilian oil firm Petrobras was also struck from the DJSI back in March following widespread corruption and fraud allegations for which the company is still under investigation. Toshiba, which was a component of the DJSI since 2000, lost its place in the midst of a widespread accounting scandal that saw its CEO resign back in July.

Volkswagen’s corporate overhaul

Volkswagen could eventually re-apply to the DJSI, but would have to stay within the world's 2,500 largest companies in terms of free float market cap — which could be a problem if shares continue to tank. After that, VW would have to re-take the CSA questionnaire and face further scrutiny by the index committee.

A spokesperson for RobecoSAM, the sustainable investments firm which coordinates the DJSI with S&P Dow Jones Indices, said Volkswagen's peers will be closely scrutinized before any automakers are promoted within the index.

Five automakers remain on the list including Renault, Peugeot, Nissan, Fiat and BMW.

Clarification: This article has been changed to reflect that RobecoSAM is a sustainable investments firm.