Transition headwinds

5 Apr 2022 | ISSB standardises standards, disclosures aren't cheap, what to watch this AGM szn. Plus, how will airlines navigate the transition?

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🔤 The standard bearers are here. Hot on the heels of the SEC, the ISSB published two drafts for global standards: one on ‘general sustainability’, the other, climate. The guidelines complement the SEC framework, but do they go far enough? Critics argue double materiality is better represented by Europe’s CSRD-GRI alliance. But there’s consolation in consolidation: Stakeholder-centric GRI and ISSB parent IFRS have jointly announced an “interconnected approach to sustainability disclosures.”

🌐 What’s ‘far enough’? Too permissive; too prescriptive: the EU taxonomy can’t get it right. Adviser the EU Platform on Sustainable Finance has now proposed “new criteria” under a traffic-light system. It goes beyond climate, beyond ‘beneficiaries’, and beyond static categories, with thresholds between red/amber/green evolving to drive a whole-economy transition. It’s the type of systems-wide approach needed for any just transition as the climate crisis collides with a mounting cost-of-living one.

💸 Public and private markets are bracing for disclosures. If 5% of the world’s 200m private companies are suppliers to its 50k public ones, that’s 10m that must level up on ESG by 2023. Data is cited as the #1 challenge among public organisations surveyed by Deloitte, with 92% predicting major investments into technology and 82% into additional resources as they’re “not properly staffed.” It won’t be cheap. There’s a fierce fight for ESG talent—and that’s on top of a historically tight labour market.

🤝 Tight labour markets make good governance. We’ve spoken about necessity and invention in the context of Russia’s invasion, which, having made a priority of energy security, may accelerate the transition. Similarly, the ‘Great Resignation’ is nudging organisations to do better. Finds HBR: “A focus on ESG is redundant: in competitive labor markets… managers trying to maximize shareholder value should of their own accord pay attention to employee, customer, community, environmental interests.”

🗳️ Pay attention to ESG this AGM season, where employee rights and climate are expected to be high on the agenda. So too: Ukraine, which poses far more complexity and far-reaching ramifications (beyond the ‘are weapons ESG’ thing). Just as calls were growing to unbundle the catchall ‘ESG’, another issue joined the (disparate) mix. How should Russia be folded into existing policies? What about other autocracies? And how can frameworks and policies and datasets flag issues before they happen?

Airlines face transition headwinds

Each week, we dig into the 120 million peer-reviewed sources that feed into the Util database to discover the SDG performance of an industry or company dominating headlines.

What’s going on?

It’s the perennial ESG question: fight or flight? Asset managers are choosing engagement, but it’s hard to engage if you don’t have a say. And UK investors in EU airlines have lost theirs, reports the FT.

Licensed EU airlines must be owned and controlled by EU nationals. To satisfy those requirements in the aftermath of Brexit, airlines have stripped away the voting rights of UK shareholders.

“Being a green investor in the airline industry isn’t easy,” concludes the FT. It’s just become a lot harder.

Investors have a choice: divest, or accept curtailed influence. With dual class share structures on the rise, it’s worth watching their activity this AGM season.

The SDG impact of Ryanair

Ryanair operates the most stringent approach of all: no UK shareholder is able to vote any of their shares, and non-EU investors are blocked from buying its ordinary shares. If they want to own Ryanair, they have to buy American depositary receipts on Nasdaq.

So. On the one hand, you’re a disenfranchised UK investor in Ryanair. On the other, looming disclosure regulation means the SEC may soon be holding the company’s feet (wheels?) to the fire for your benefit. The budget airline, like its industry, is up against a number of material sustainability challenges.

The SDG impact of Ryanair

Passenger airlines have a big climate problem, which undermines their performance on a suite of social and environmental targets. These include SDGs 1 (No Poverty), 3 (Good Health & Wellbeing), 11 (Sustainable Cities & Communities), 12 (Responsible Consumption & Production), 13 (Climate Action), 14 (Life Below Water), and 15 (Life On Land).

Pre-pandemic, the industry accounted for 2.5% of global and 4% of European carbon emissions. But it bears responsibility for more global warming than is implied by its carbon footprint.

Our models show aircraft emissions have a “host of other short-lived, non-CO2 effects that are complex, involve impacts that are both warming and cooling, and are unique to this sector,” such as “an increase in tropospheric ozone (warming) and the long-term destruction of… ambient methane (cooling).” Overall, they have a net warming effect, calculated by the difference between “positive and negative radiative forcing” (or: the energy thats absorbed by and radiated away from the atmosphere, respectively).

In total, the aviation industry accounts for 3.5% of positive radiative forcing. That’s 3.5% of global warming, if not more for airlines operating in Europe. Like Ryanair. And contrails—not carbon—account for almost two-thirds of that.

So Ryanair’s pledge to reach carbon neutrality by 2050 doesn’t address the full picture. Admittedly, its strategy is underpinned by greater adoption of sustainable aviation fuel (SAF), but while SAF is associated with “reduced contrail ice numbers… less energy deposition… and less warming,” the effect has been recorded as material only for flights using a lot of it. Unfortunately, there’s only “sufficient resource base to support approximately 3.4 million tonnes of advanced SAF production annually, or 5.5% of projected EU jet fuel demand in 2030.” Ryanair is betting on 12.5%.

The other problem with SAF? Price, which stands at 3-5x more than jet fuel.

Based on Ryanair’s pre-pandemic books, the additional cost of a 12.5% allocation to SAF would top its entire annual profit. And bad news for Ryanair is bad news for SDGs 8 (Decent Work & Economic Growth), 9 (Industry, Innovation & Infrastructure) and even 17 (Partnership for the Goals).

Airlines “promote sustainable development,” by “generating employment, creating wealth, stimulating tourism, and contributing to world trade.” Ryanair has been a pioneer of low-cost air travel, “[ensuring] mobility on an equitable basis to all sectors of society.” And “mobility, particularly air transport, is vital to the economic stability and growth of a nation.” One source goes further: aviation is “the lifeline of every nation.”

If it expects to meet its targets, Ryanair may be forced to raise prices. Or cut its investment in alternative, more sustainable fuels: one possibility about which industry insiders are already concerned. The end outcome would improve its standing on the environmental SDGs, but it could come at a cost to a number of the social ones— including SDG 2 (Zero Hunger), given the concerning relationship of biodiesel with “food scarcity and deforestation,” and “food price inflation.”

Whether in AGMs or annual reports, these are questions Ryanair must soon address.