Will the idea of socially responsible investment and air travel ever get off the ground? From some perspectives it seems unlikely and there are plenty of damning statistics highlighting the reasons why. Dr. Volker Grewe of the DLR – Institute of Atmospheric Physics, for example, said in a recent paper that aviation accounts for 5% of man-made climate change.
While emissions from the airline industry might seem low at 2% of the total, compared with about 14% from agriculture and 26% from energy generation, airplane emissions are expected to rise by about 2-3% a year.
So is there any possible justification for a socially responsible investor to add airline exposure to their portfolio? Mikhail Zverev, head of global equity at Standard Life Investments, says there are some important distinctions to make between different airlines in this respect.
Here he highlights Ryanair, a 2.5% allocation in his SLI Glo SICAV Global Equities fund, which is striving to improve fuel efficiency where possible.
‘Ryanair’s fleet is one of the most modern, it has the most fuel-efficient planes in its class and it consistently pushes that forward in terms of ordering new stock. Its management approach ensures that its fleet is new,’ he says.
‘The firm typically doesn’t hold planes past seven years, which is when you need to have a proper refurbishment and a big service. It always refreshes its fleets to have the latest kit.’
The manager adds that Ryanair’s overall costs are the lowest in the industry. The company does not pay investors a regular dividend and its competitive costs are helping it to grow capacity by 10% each year.
‘It has an environmental policy and it would say the environmental footprint is part of that agenda, but I think a big chunk of that is about how you get the lowest cost per mile,’ he says.
Going the extra mile
Even if the number of flights is set to increase, Alexei Jourovski is among those who are welcoming dedicated efforts by carriers to mitigate their environmental impact. The Citywire A-rated manager, who runs the UNI-Global Equities Europe fund, says charging models are an example of this trend.
‘Some airlines levy an additional charge that the customer can opt into. The airline then invests this money in an environmentally friendly way to offset the carbon emission,’ Jourovski says.
‘However, this is not common practice. Most airlines compete for efficiency by switching to cleaner aircraft like EasyJet. It tries to advertise the fact it has a cleaner fleet to give the customer a feel-good factor.’
Elsewhere, airlines like Qantas and Virgin have offered passengers the chance to add carbon credits to their airfare, which are then donated to schemes around the world that aim to reduce greenhouse gasses. However, only 1% of travellers with Virgin chose to offset their emissions in 2014-2015.
So how do other forms of travel stack up? We covered the SRI investment case for driverless cars in our February issue, but what about trains? In Europe, rail travel is touted as a green alternative as they typically emit less carbon than airplanes. However, Zverev (pictured) believes the investment case for this sector is difficult to compare.
‘Passenger rail travel doesn’t have a great history of value creation. Much of the system in Europe was developed to have a big component of public sector subsidy and public ownership, so you can’t really compare the two investment cases that easily.
‘European rail travel is good. Euro-railing is a compelling option, trains in Benelux and Germany and France are fast, comfortable and convenient options and yet the short-haul, low-cost airlines are still a growth sector so clearly there is a competitive offering there,’ he says.
Nevertheless, while technology has made advances in cutting harmful emissions in the airline industry, Jourovski believes that the inner workings of planes are unlikely to change in the foreseeable future.
‘Due to the nature of the internal combustion engine and the turbo propeller aircraft it is difficult to see a big change in the next 20 years. Longer term, I believe the picture depends on the general availability of oil and any technological advancement such as electrical flight. In our view there is still a long way to go,’ he says.
Meanwhile, Zverev doesn’t see serious competition from other forms of travel and believes it will be difficult to change the behaviour of consumers who are now so used to the convenience of flying.
‘Global passenger numbers are growing, people love to travel. It might be clichéd, but consumer aspirations are increasingly more about intangible experiences rather than material possessions.
Travel is a big part of that. Whole new markets, especially in emerging powerhouses like China, are discovering air travel.’
So perhaps that is the important point to grasp. Air travel is here to stay and set to grow and for this reason some SRI involvement may be better than simply turning your back and having no influence at all.
This article originally appeared in the May edition of Citywire Selector magazine.