Environmental and social risks

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

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

Personnel risks

We use a range of instruments to counter economic risks as well as changes in the market and the competitive situation and shortages of supplier components. These 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, flexible shift models and legally regulated instruments such as Kurzarbeit (short-time working). 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 and the structural transformation of the automotive industry.

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 integrated degree Studium im Praxisverbund and traineeship scheme, Faculty 73 and the Volkswagen-sponsored non-profit École 42 in Wolfsburg and Berlin, 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, but also system-based improvements so that Volkswagen can ensure compliance with data protection laws when processing personal data. Volkswagen is aware of its responsibility in the processing of this data. To make processing compliant with data protection requirements, we address 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 has had a negative impact on business development since 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 our experience to date, 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 and published by the EU in 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. Up to and including 2020, European fleet legislation was complied with on the basis of the New European Driving Cycle (NEDC). From 2021 onward, the NEDC target value was replaced by a WLTP target value through a process defined by lawmakers; this change has not led to additional tightening of the target value. A similar approach applies to light commercial vehicles, where a target of 147 g CO₂/km applied to the entire fleet in 2021.

The targets will be tightened as from 2025: for new European passenger car fleets, a reduction of 15 % in CO₂ emissions 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 WLTP fleet value in 2021. These targets can only be achieved through a high proportion of electric vehicles within the fleet.

If the respective fleet-wide target is not fulfilled, the Commission may impose 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 of new vehicles 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. For 2021, this quota was 14 % and had 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, the annual CO₂ and efficiency targets to be fulfilled by the fleet for new passenger cars and light commercial vehicles are defined by the greenhouse gas legislation (since 2012) and Corporate Average Fuel Economy legislation (CAFE). A decision was reached in fiscal year 2020 to relax CO₂ 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 CO₂ fleet targets set by the CARB, which are more ambitious than the national standards. In December 2021, the current administration published the new CO₂ fleet targets for the period from 2022 to 2026, thereby reversing the loosening of the targets by the previous administration. The form of the efficiency targets (CAFE) for this period is still under discussion.

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 are becoming increasingly common. The Volkswagen Group closely coordinates technology and product planning with its brands so as to avoid breaches of fleet values, for example. 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.

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 debate on a successor regulation began at European level in 2020. A conclusion to this debate and thus new legislation is not expected before 2023. It is not anticipated that this successor regulation will enter force until the second half of the decade.

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 electricity

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 emissions exceed these targets, vehicle manufacturers will be liable to substantial 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.

The review of the requirements on CO₂ emissions for heavy commercial vehicles planned in the EU for 2022 could additionally toughen these challenges. Meeting these EU targets requires reducing CO₂ emissions through new technologies. We are therefore making substantial investments in climate-friendly alternative drives – especially battery-electric commercial vehicles (trucks and buses).

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. Various of the above-mentioned regulations and directives are currently being revised within this framework to support the achievement of climate targets. This may lead to even more stringent requirements for CO₂ emissions (fleet limits) for the automotive industry.

The debate around driving bans for diesel vehicles in Germany has lost some of its heat given the strong improvements in air quality measurements. There was a significant reduction in the number of municipalities and cities that failed to comply with the air pollutant limits for nitrogendioxide (NO₂) immissions in 2021. 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 aforementioned debate could negatively affect sales of diesel vehicles and result in financial liabilities and possible official requirements.

Local bans on the use of diesel vehicles are already also in place in a number of other countries, though these mainly affect older vehicles with lower emissions standards. 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.