sustainable investment
Climate engagement: decarbonising aviation and energy
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For professional investor use only Important information on case studies The case studies provided in this document are for illustrative purposes only and do not purport to be recommendation of an investment in, or a comprehensive statement of all of the factors or considerations which may be relevant to an investment in, the referenced securities. The case studies have been selected to illustrate the investment process undertaken by the Manager in respect of a certain type of investment, but may not be representative of the Fund’s past or future portfolio of investments as a whole and it should be understood that the case studies of themselves will not be sufficient to give a clear and balanced view of the investment process undertaken by the Manager or of the composition of the investment portfolio of the Fund now or in the future. |
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Need to know
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Reaching and sustaining a net-zero world is one of the most difficult yet crucial challenges we face today. Given the policy, social and technological forces driving the transition, companies are being encouraged to act from a myriad of angles. But are they embedding climate risks, opportunities and decarbonisation strategies at the core of their organisations?
As signatories to the FRC Stewardship Code, and investors focused on the transition to a CLIC™ economy that is Circular, Lean, Inclusive and Clean, engagement is fundamental to our investment approach. We believe it can encourage and optimise companies’ climate strategies, thereby effecting change in the real economy.
Our climate engagement approach
No matter what stage of the decarbonisation journey a company is at, engaging on net zero is a key lever to help a business mitigate and adapt to climate change while reducing regulatory risk and improving access to capital. At LOIM, we apply the Oxford Martin Principles for Climate Conscious Investment to guide our engagements on net zero. Its three questions allow us to address decarbonisation irrespective of a company’s progress – from improving awareness among lagging companies to emphasising the need for a robust transition strategy and making companies accountable on commitments taken. They are:
- Do you have a public commitment to net-zero?
- Do you have a profitable business plan under net-zero?
- Have you disclosed medium term metrics supporting the commitment?
For each of the principles, we have developed lines of enquiry seeking to encourage companies to transition. Our engagements also take TCFD recommendations into account.
Our carbon methodology
At LOIM, we believe the net-zero transition will affect every corporate sector. Our carbon expertise not only enables us to assess whether or not a company’s emissions trajectory is aligned with limiting global warming to 1.5°C, the fullest ambition of the Paris Agreement, but also its exposure to specific risks:
- Transitional: can a company’s business model adapt to a world with net-zero emissions?
- Physical: how will extreme weather and other adverse effects of climate change impact a business?
- Liability: what penalties will be directed at firms do not decarbonise fast enough, or fail to reduce emissions at all?
Our understanding of these risks informs our engagements on climate change. Recognising that the net-zero transition requires solution providers as well as real decarbonisation in sectors where emissions are hard to abate, we engage a diverse range of companies across sectors, allowing us to emphasise the importance of a business’s transition roadmap rather than whether their current carbon footprint is.
Some are leaders in CO2 reduction and others are in the initial stages of setting targets.
Engagement on climate – at scale and in depth – helps drive the monumental task of guiding the economy to a 1.5°C path.
Impactful partnerships
We do not always act alone. We proudly contribute to collaborative engagement efforts like Climate Action 100+ to encourage carbon reduction by the world’s heaviest corporate emitters. We are also part of other climate-focused investor initiatives, such as the UN Global Compact, the Institutional Investors Group on Climate Change (IIGCC) and the Task Force on Climate-Related Financial Disclosures (TCFD).
Emissions reductions for Climate Action 100+ focus companies with net-zero goals
Source: BloombergNEF, Climate Action 100+, Bloomberg Terminal. Note: Emissions are based on the portion of a company’s carbon footprint that is included in the net-zero target. Chart assumes companies consistently reduce their emissions year-on-year.
US airline company: plotting a decarbonisation route
Engagement background
We engaged a company in the airline industry that has a high implied temperature rise under our in-house methodology (LOPTA). The company had published a carbon-neutrality commitment in March 2020 and we were keen to gauge its progress in the context of the aviation sector, a hard-to-abate industry. Even with fewer flights due to the pandemic, the company, as well as the wider industry, still faced the challenge of reducing its carbon emissions in line with its goals to reach net zero.
What we asked for, and what we did
The company confirmed its climate commitment. The airline seeks a 50% reduction in emissions by 2050 relative to 2005 levels. Its strategy hinges on building a more energy-efficient fleet, reducing emissions through carbon offsets and using alternative fuels. We emphasised that aircraft efficiency comes not only from a newer fleet, but also from route management. We also highlighted the importance of investing in sustainable aviation fuels: the company has at least five partnerships and iscommitted to replace c.10% of conventional jet fuel demand with sustainable aviation fuel by 2030. We encouraged even greater investment in biofuels as part of the large investment already publicly announced. We also asked about the alignment between the decarbonisation strategy and executive remuneration packages, as we did not identify such a link and believe it is key to driving the strategy forward. Finally, we highlighted the need for the company to improve its annual ESG reporting.
Outcome
This engagement allowed us to better understand the company’s net-zero strategy and the obstacles it faces, such as the industry-wide lack of alternative fuels. We were able to emphasise the need to set more ambitious, science based and certified targets, express our view that relying on carbon offsets is not the preferred way forward – as these only lower intensity, not absolute emissions– as well as suggest that decarbonisation targets are included in determining executive compensation. We believe this latter point is crucial: there must be a clear, measurable and reported alignment between the stated business strategy around decarbonisation and the desired outcomes we expect of the individuals executing the strategy.
We were also very pleased to see, in 2021, the publication of the company’s inaugural ESG report, giving shape and public codification to the work it has undertaken and clearly articulating its near, medium and long-term term strategy, as well as renewed agreements and investments to develop sustainable fuel. Finally, industry pressure and leadership will continue to play a key role in the airline’s decarbonisation path: IATA (of which this company is a member of) approved a resolution at this October AGM for the global air transport industry to achieve net-zero emissions by 2050.
Next steps
Our engagement with the company will focus on the introduction of climate metrics in executive pay as well as better understanding what role it can play, as an industry leader, within IATA’s commitments to achieve net-zero by 2050.
Nordic oil-refining company
Engagement background
This company’s renewable-energy business was already geared to a net-zero future. We aimed to understand its approach and best practices for the sector, and to encourage the extension of its net-zero commitment across the entire corporate strategy, and to the enhance governance of climate risk
In our opinion, such governance should incorporate specific climate metrics in executive remuneration, as well as investing further in innovative raw-materials processing and committing to a best-practice decarbonisation strategy – as downstream emissions from energy consumers is an essential yet often ignored part of the carbon footprints of companies from this sector.
What we asked for, and what we did
In our dialogue, it became clear that the company has a very sophisticated and mature approach towards sustainability and transitioning to net zero. In fact, the transition appeared to be well embedded in the business strategy.
We identified several areas where we thought the company could improve and show further leadership in the climate transition:
- Incorporating additional specific climate metrics in variable executive remuneration packages
- Continuing to invest in innovation for greater efficiency in using raw materials
- Committing to disclose scope 3 emissions disclosure
- Most importantly, developing a net-zero strategy encompassing the entire business
Outcome
We were encouraged by the responsiveness of the company, its commitment to keep our considerations under review and the further progress it has made. In Q4 2021, it committed to setting a scope 3 emissions targets and joined the Business Ambitions for 1.5°C initiative.
Next steps
We will continue to engage on scope 3 targets rollout as well as enhanced climate metrics in executive pay.
A hopeful future
Rethinking net zero is imperative for our stewardship and investment strategies. As the transition accelerates, investors need to reduce their exposure to climate risk while targeting growth opportunities being generated by widespread decarbonisation.
Through engagement, we aim to encourage companies, some which have just started their decarbonisation journeys and others who are current leaders, to make further progress. This helps them adapt to a carbon-free future, resulting in more resilient investment performance while addressing one of the eight sustainability challenges of our core investment conviction: the shift to a CLIC™ economy that is Circular, Lean, Inclusive and Clean.
LOIM was part of the first wave of signatories of the FRC’s emboldened Stewardship Code. To learn more about our stewardship approach, implementation and outcomes, please read our 2020 Stewardship Report.
important information.
For professional investor use only
This document is issued by Lombard Odier Asset Management (Europe) Limited, authorised and regulated by the Financial Conduct Authority (the “FCA”), and entered on the FCA register with registration number 515393.
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