Engagement in focus

It will be equally important to assess whether companies’ decarbonisation strategies are credible, achievable and effective. We are a signatory to the Net Zero Asset Managers initiative, and engaging with companies on this theme will play a key role in our stewardship activities for 2023.

One headwind to reducing carbon emissions to help limit global warming is the disconnect between supply and demand. Several sectors face a stalemate between suppliers waiting for robust demand and customers waiting for affordable solutions. With neither side willing to move first, both are left frustrated, and the planet is no better off. Part of our engagement strategy is to catalyse innovation and adoption of low-carbon solutions by building relationships with stakeholders across the ecosystem. Our aim is to align expectations and incentives, helping to bridge the gap and break abatement stalemates.

One area where we have started to focus our resources is the aviation industry, which is often painted as the pantomime villain of carbon emissions. It’s no secret that planes are high emitters – in 2021, the sector was responsible for over 2% of global energy-related CO2 emissions. Since the pandemic brought air traffic to a standstill, passenger travel has recovered to nearly two thirds of its previous level, and air cargo has surpassed its pre-covid peak. So the industry is poised to keep emitting significant levels of greenhouse gases unless structural progress can be made.

Abatement technologies are in their infancy and, while they should address the issues aviation companies face, so-called green premiums and low volumes make these solutions expensive.

However, demand is growing. Airlines and logistics companies are upgrading their fleets to boost fuel efficiency and are signing deals with producers of sustainable aviation fuel as they focus on their 2030 emissions targets. Some fleet owners are even placing orders for electric aircraft. While this is all at very small scale relative to the demands of Net Zero, momentum is building.

Ryanair holds a market leading position in European short-haul travel. In our opinion, it is well placed to use its size and influence – not to mention its superior financial flexibility – to deliver on the aviation industry’s transition objectives. We intend to build a long-term relationship with the company (and the wider industry) to gain a better understanding of the challenges and bottlenecks it faces in its pursuit of Net Zero. We began our engagement this quarter by meeting with Ryanair’s director of sustainability and finance. We also attended the company’s Sustainability Day, focused on the industry’s pathway to Net Zero.

The airline industry faces a unique situation. Meaningful decarbonisation will require upgraded fleets and a switch to greener fuel. These abatement levers will depend on investments and innovations made by suppliers. However, given the industry’s tight regulation and high green premiums, it will also be reliant on policymakers to start the energy transition in earnest. The objective of our initial meeting was to gain some visibility of key abatement parameters (some within the company’s sphere of control, others dependent on regulators or suppliers) which could ultimately be translated into competitive advantages.

We aim to continue engaging with the ecosystem surrounding sustainable aviation fuel. This could lead to discussions on biomass, green hydrogen or even technological innovations. As the portfolio evolves, we may shift our focus and channel our engagements towards the relevant companies we hold.

Given the urgency of decarbonisation, and the stubborn technological challenges faced by hard-to-abate industries like aviation, we are on the look-out for first movers. These are companies that can lead their sector on the journey to Net Zero, forging a path that peers are forced to follow and thus building a lasting competitive advantage in the process. By engaging with companies in these sectors, we aim to leverage our in-depth understanding of every element of the value chain and drive real-world change.