By Ravi Varghese (@RaviVarghese), Vice President & ESG Analyst, Epoch Investment Partners, New York 

Ravi Varghese

Financial markets have been roiled lately by fears about the economic impact of the coronavirus. The aviation sector has not been spared as consumers and businesses defer non-essential travel. The International Air Transport Association (Iata) estimated that the coronavirus could result in passenger airlines losing up to $113b in revenue. It’s understandable that aviation executives and investors are focused on the immediate coronavirus threat. Behavioural scientists refer to this as salience bias, where individuals are more likely to focus on information or events that are more prominent. But it would be a shame if longer-term threats – such as climate change – were to fall by the wayside. Crafting a response to coronavirus, while necessary, should not derail a long-term strategy for climate change.

The need to account for long-term risks underpinned Epoch’s decision to join 121 other investors, with nearly $6 trillion in collective AUM, in signing the PRI-led Investor Expectations Statement on Climate Change for Airlines and Aerospace Companies. To date, aviation’s contribution to climate change has attracted relatively little scrutiny from regulators compared to sectors such as power, road transportation and heavy industry. This is a function of aviation’s small carbon footprint vs. other sectors and the lack of established technological solutions. But we do not believe this situation is likely to persist, with the number of annual airline passengers set to double to 8.2 billion by 2037. As the PRI has articulated in its work on the Inevitable Policy Response, a low level of regulatory attention today could merely herald a more forceful and possibly hasty response in later years.

Regardless of timing, carbon pricing and/or regulation could have profound investment implications for companies across the value chain, including both passenger travel and air freight. Airlines, who have long sought to be fuel-efficient, will redouble their efforts to minimise costs. Moving from the income statement to the balance sheet, aircraft are extremely costly forms of capital expenditure, so purchasers such as airlines or aircraft lessors will be conscious of “stranded asset” risk. Airlines will also demand innovation in electric aircraft and sustainable aviation fuels as well as improved air traffic control systems which support fuel efficiency. This will have major repercussions for aircraft and parts manufacturers as well as producers of avionics systems.

ESG investors are often asked if their expectations penalise their portfolio companies vs. competitors. The answer, simply, is no. First, it is important to convey that climate transition risk may equally be climate transition opportunity. This has no doubt motivated some companies to act early to protect their competitive positions. Among US carriers, Delta Air Lines and JetBlue announced major programmes to reach carbon neutrality in 2020. (As an aside, critics will no doubt point out that these goals rely on carbon offsets in the short term. While the use of carbon offsets is fraught with difficulties, we believe they can make sense for near-term emissions reductions, and can stimulate companies to take broader action.) Second, Epoch encourages companies to push forward robust and coherent industry-wide solutions. This ensures that no company suffers from pursuing sustainability. The aviation and aerospace sectors are no different, and it is in companies’ own interests to shape a thoughtful collective approach to climate change.

Epoch will be further outlining its approach to ESG integration for the airline and aerospace sectors in a paper to be published shortly. In the meantime, we are delighted to support the PRI in moving this initiative forward and intend to use the new Investor Expectations Statements as the basis for engaging with companies in the sector. It may be difficult to focus on long-term issues with the lingering threat of coronavirus, but we remain confident that the thrust of responsible investing can overcome the drag of day-to-day events as companies accelerate to a climate-friendly future.


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This blog is written by PRI staff members and guest contributors. Our goal is to contribute to the broader debate around topical issues and to help showcase some of our research and other work that we undertake in support of our signatories.

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The views expressed herein are those of Epoch’s investment professionals at the time the comments were made. They may not be reflective of their current opinions and are subject to change without prior notice.

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