Investors in Fiat ignored warning signs

Investors in Fiat, the carmaker under investigation for violating emissions laws, have been accused of ignoring clear signs of corporate governance failings at the Italian-US business.

Fiat Chrysler’s share price fell 16 per cent on Thursday immediately after the US environmental watchdog warned the company could face a fine of up to $4.6bn. It is accused of breaking emissions laws in 104,000 diesel vehicles.

The US regulator is investigating whether the carmaker used devices to cheat emissions tests, akin to the case of Volkswagen, which last week agreed to pay a fine of $4.3bn.

Fiat has denied any wrongdoing, but investors have rushed to sell off the carmaker. The company’s share price was down 14 per cent by Friday afternoon.

Rating agencies said there were several warning signs that Fiat had problems, even before news of a potential multibillion-dollar fine broke.

Howard Sherman, executive director of research at MSCI, the investment research company, said: “Investors should certainly have been aware of the risk [of problems at Fiat] by now.”

According to MSCI, Fiat was ranked lower than 85 per cent of 7,000 companies globally when it came to corporate governance, a measure used by some asset managers when making investment decisions.

The carmaker’s governance score was lower than Volkswagen’s in 2015, when the news first broke that the German auto company had been accused of cheating in US emissions tests.

Governance at VW was ranked lower than 72 per cent of companies globally at the time.

Mr Sherman says Fiat’s corporate governance score has fallen over the past year due to concerns about issues such as high executive pay and “notable dissent on director election votes”. More than 12 per cent of investors voted against the re-election of John Elkann, a member of the Agnelli family that controls Fiat, as a director last year.

Sustainalytics and Oekom Research, two rating agencies that look at the environmental, social and governance credentials of companies across the world, had also flagged concerns with asset managers about Fiat over the past 18 months.

Kristina Rüter, head of research at Oekom, said the carmaker had been under close watch over ESG concerns since 2015, when a study in Germany found that the Fiat 500X model emitted much higher emissions than expected.

“The current developments do not completely surprise us, as there had been earlier indications of irregularities concerning elevated emissions of Fiat Chrysler diesel models under realistic testing conditions,” she added.

On Thursday, Sergio Marchionne, chief executive of Fiat, said the idea that his company intended to cheat emissions tests was “unadulterated hogwash” and argued that there is “nothing in common between the VW reality and what we are describing here”.

Sasja Beslik, head of sustainable finance at Nordea Wealth Management, which includes the Nordic bank’s asset management arm, said it was speaking to the company to assess the impact of the accusations.

Nordea holds €37m in Fiat shares. “At this stage we are gathering information and will make a decision on next steps during the next two weeks,” Mr Beslik said.