We seek issuers with clear and high-impact strategies to reduce their emissions in line with the targets set out in the Paris Agreement. Since this implies that there are already emissions to be cut, it follows that we invest in some of the higher-emitting sectors; engagement and careful monitoring of their environmental reforms then become key.
We carefully review issuers’ corporate policies and activities to evaluate their progress in reducing emissions. We do this through regular dialogue, qualitative and quantitative analysis, and data from the Carbon Disclosure Project, an international non-profit that facilitates environmental reporting and risk management.
We then consolidate these work streams to produce a climate scorecard with a single metric that indicates if an issuer is on track to meet targets in line with restricting global temperature rises to beneath 2°C.
Here’s how we do it.
easyJet
EasyJet is a European short-haul airline that aims to provide a low-cost option to both leisure and business travellers.
As an airline, easyJet is exposed to significant climate risk and works in a technical space where scalable zero-carbon technologies are unlikely to be available in the short to medium-term.
Industry context
The industry as a whole is responsible for 2% of global CO2 emissions which, thanks to additional non-carbon output, is responsible for 5% of global warming – and passenger numbers are expected to double in the next two decades.[1]
When we narrow our focus to only cover transport, airlines become responsible for 12% of the sector’s emissions[2] - and that does not include other negative environmental impacts that are more difficult to quantify, such as contrails left in the wake of aircraft or disruption to cloud formation.
The Covid-19 pandemic has only made the situations more difficult, with airlines among the companies most drastically hit by travel restrictions and research and development budgets consequently placed under pressure.[3]
However, in recent years there have been sustained industry-wide efforts to address these environmental issues, from the development of electric and hybrid aircraft[4] to the exploration of new biofuels[5] to the codification of targets by a number of industry bodies.[6]
What are easyJet’s sustainability targets?
The company has based its sustainability strategy on three key pillars, with the overall goal of delivering net zero emissions:
- Offsetting emissions from fuel and operations
- Stimulating innovation in new technologies that could lead to a low-carbon industry
- A package of sustainability policies and targets that look beyond easyJet’s own emissions to its supply chains and external stakeholders.[7]
How is easyJet working towards these targets?
The company already has a number of actions in place to work towards a sustainable future for the airline industry.
- In 2020, climate change-connected targets became part of the management board’s remuneration settlements
- Net CO2 emissions per passenger kilometre flown is one of the board’s six KPIs
- The company is working to develop its emissions targets and trajectory with the Science Based Targets initiative (SBTi), an external non-profit partnership between the CDP, UN, WWF and the World Resources Institute
- In early 2020, easyJet’s board decided to offset 100% of the firm’s carbon footprint by investing in high-quality carbon credits.
- These are exclusively in Gold Standard and Verified Carbon Standard (VCS) carbon credits. Around 20% are issued by renewable energy projects, and the majority is issued by conservation-linked projects like reforestation operations
- To mitigate the lack of regulation in carbon credit trading, easyJet voluntarily joined the Taskforce on Scaling Voluntary Carbon Markets, an initiative aimed at facilitating the rapid scaling and maturation of this market
- Easyjet is in the process of introducing a new generation of Airbus A320neo aircraft to its fleet, which offer significantly high levels of fuel efficiency than their predecessors
- New standard operating procedures prioritise efficient flying, with a range of practices implemented including single-engine taxiing, more sophisticated weather monitoring technology to avoid challenging conditions, and reviewing and optimising the amount of discretionary fuel loaded onto every flight.[8]
Where is easyJet in relation to its targets?
Given these significant structural issues airlines face in becoming fully sustainable businesses and the fact that greenwashing is an issue in industries with far less environmental impact, it’s sensible to take some of easyJet’s language around their emissions policies “making history”[9] with a pinch of salt.
Some climate scientists even argue that the idea of ‘offsetting’ as promoted by certain industries creates a false sense of security, simplifies complex problems, and in the process may actually encourage higher net levels of emissions in the long run.[10]
However, it is unrealistic to expect companies to deliver radical changes to their business models overnight, and it is equally unrealistic to expect firms like easyJet to forego meeting clear consumer demand.
Also, while climate scientists may critique carbon credits, in the real world they are invaluable tools that harness the power of markets to deliver beneficial outcomes[11] for industries, businesses and the wider community. They direct finance to climate mitigation projects that might otherwise struggle, support innovation in technologies that may facilitate a lower-emission future, and – taking a more global view – smooth the flow of capital to the global South, the region of the world that is most exposed to climate risk.
To help make sense of this complex picture, Mirabaud Asset Management produces a Climate Scorecard for environmentally-exposed assets.
We do this by consolidating a wide variety of our own research and external data sources to produce a weighted score for a company that represents our view of their progress toward alignment with the Paris Agreement’s emissions targets.
Crucially, instead of looking backward, we choose to evaluate where the company in question’s strategy is directed, and compare its stated goals with the actions it has taken toward them.
With regard to easyJet, we have already covered many of the questions we ask in building the Scorecard: stated climate change policies, management incentives to cut emissions, climate risk management strategies and more.
These all add to a positive score. While there is clearly more work to be done to reduce emissions – the data indicate a narrow shortfall in easyJet’s cutting of emissions to within the 2°C threshold – our research indicates the company is on track overall.
The investment case
We can conclude by considering the overall outcome of easyJet’s corporate posture in favour of mitigation measures how congruent it is with the Global Climate Bond Fund’s investment thesis.
The Fund has adopted a hybrid strategy, investing in both green bonds and those issued by companies with both the stated goal of net-zero carbon emission and well-evidenced actions toward this goal.
Green bonds are specifically labelled as such, and easyJet’s are not, instead sitting in the climate transition section of the fund.
However, given the fund’s inclusive approach to issuers who are driving the energy transition within their sectors, we have concluded that EasyJet is an appropriate investment.
It is clear the company has some distance to travel before it can fully overcome the structural challenges inherent in running an airline, but the trajectory is a positive one in our view, and it is far from underperforming on environmental issues.
[1]www.aef.org.uk/campaigns/reducing-aviations-emissions-across-the-globe/
[2]www.transitionpathwayinitiative.org/publications/35.pdf
[3]www.iea.org/articles/the-impact-of-the-covid-19-crisis-on-clean-energy-progress
[4]www.airbus.com/innovation/zero-emission/electric-flight.html
[5]doi.org/10.1595/205651320X15816756012040
[6]www.eurocontrol.int/editorial/environmental-protection-challenge-opportunity-aviation
[7]corporate.easyjet.com/~/media/Files/E/Easyjet/pdf/investors/agm/agm-dec-2020/annual-report-2020.pdf
[8]corporate.easyjet.com/~/media/Files/E/Easyjet/pdf/investors/agm/agm-dec-2020/annual-report-2020.pdf
[9]mediacentre.easyjet.com/story/13474/easyjet-to-become-the-world-s-first-major-airline-to-operate-net-zero-carbon-flights
[10]www.nature.com/articles/484007a
[11]https://www.mckinsey.com/business-functions/sustainability/our-insights/how-the-voluntary-carbon-market-can-help-address-climate-change
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