Coalition bemoans lack of climate progress in transport industries

Research by the Transition Pathway Initiative, a collaboration of investment managers, pension funds and advisers worth $22.8tn (£18.5tn), found that only 39 per cent are on a decarbonising trajectory in line with the Paris accord goal of limiting global warming to 2C by 2030. Among the TPI’s supporters are several Local Government Pension Scheme pools, the Pension Protection Fund, and private sector schemes like the Railways Pension Scheme.

The TPI found that just 18 per cent are on track to meet the more ambitious scenarios of keeping well below 2C by 2030, and below 2C by 2050.

There is a clear message for all investors here, whether small pension schemes or giant asset managers, that disruption has come to the transport sector. It has a massive exposure to the risks of the low-carbon transition, and contains huge opportunities in low-carbon transport that governments are willing to support

Euan Stirling, Aberdeen Standard Investments

Responsible for nearly a quarter of total energy-related CO2 emissions worldwide, the sector and its constituents are key drivers of demand for fossil fuel extraction. However, the TPI found that it includes the worst-performing sector of any high-emitting industry, that of aviation.

In that specific sector, 91 per cent of airline companies failed to align with any of the climate standards used by the TPI. Just one company scrutinised by the project, United Airlines, had met this demand, with most others in the industry continuing to insist on the inclusion of offsetting in their carbon-intensity targets. Encouragingly, eight companies have now agreed to end this practice.

In the automotive sector, eight out of 23 companies were set to meet Paris targets by 2050, despite the quality of climate-related governance having worsened slightly over the past year.

Interestingly, just three companies are on track to meet the 2030 targets, suggesting car manufacturers have massively backloaded plans to reduce their carbon emissions.

Shipping put in a strong showing on carbon performance. More than half of companies surveyed had business strategies aligned with the 2030 goals. However, the TPI argued that the low number of 2050 adherents meant more ambitious targets were necessary.

The sector also had the worst climate governance, scoring an average of 1.8 out of five in management quality — five companies “either do not disclose their emissions from shipping operations, or do so in a form that TPI cannot assess”.

No time for fudged numbers

Antonina Scheer, the report’s co-author and a researcher at the Grantham Research Institute on Climate Change and the Environment at the London School of Economics, hailed a “unique opportunity for industries to transform themselves as we look to build back better post-Covid”.

“The overarching conclusion is that the majority of transportation companies we have assessed are failing to plan for a future that keeps the global temperature increase at or below 2C. We have unique recommendations for each sector in order to improve this worrying situation,” she said.

Source: Transition Pathway Initiative

Ms Scheer urged aviation companies to revisit their inclusion of offsetting in targets and reporting, which prevents the TPI from including them in assessments and “results in the overwhelming lack of alignment in this sector”. She added that companies could set and state an explicit cap on how much of their emissions target is achieved by offsetting, allowing them to ”calculate the emissions reduction occurring within the company’s own operations and compare the resulting carbon intensity with our aviation benchmarks”.

She warned car manufacturers of the risks still present in a climate strategy that only gets into its stride after 2030, while urging shipping companies to be more ambitious in their goals.

What can schemes do?

Lessons for the institutional investment market are harder to discern. The TPI report’s finding that overall Paris alignment had increased over the past year indicates positive pressure levied on companies by engaged shareholders, but the poor overall level of adherence suggests investors still have work to do in mitigating environmental, social and governance risks.

Euan Stirling, global head of stewardship and ESG investment at Aberdeen Standard Investments, struck a positive note: “All investors will use TPI data in different ways, but certainly many will engage with transport companies based on these findings either directly or through collaborations like CA100+.

“Speaking with investors, I get the sense that while there is certainly concern that the transport sector is not transitioning as quickly as the Paris agreement goals demand it must, there is also the understanding that the magnitude of the task facing the transport sector and the extreme challenges of 2020 mean that investors are withholding judgment to some extent on the climate progress the sector is making.”

Mr Stirling said the Covid-19 pandemic had delivered a clear message with its upset of traditional transportation methods, and urged the industry to embrace technologies highlighted in the report, such as solid-state batteries in cars and more efficient jet engines.

“There is a clear message for all investors here, whether small pension schemes or giant asset managers, that disruption has come to the transport sector. It has a massive exposure to the risks of the low-carbon transition, and contains huge opportunities in low-carbon transport that governments are willing to support. So as good stewards, investors must engage to encourage transport companies to act decisively to address climate risks and opportunities,” he said.

Many UK pension schemes are still some way off including sector-specific policies in their ESG strategies, relying on asset managers for now.

Luba Nikulina, global head of research at Willis Towers Watson, praised the TPI for highlighting the key role transport companies play in creating demand for fossil fuels. She said that regulations were beginning to require schemes to report on their stewardship policies and voting by their managers, but that few have yet reached this level of granularity.

“It’s still such early days,” she said, explaining that many currently rely on asset managers’ knowledge of sector-specific sustainability issues. “But I do expect that to change, and one of the more influential regulatory developments from this perspective will probably be Task Force on Climate-related Financial Disclosures reporting.”

Scheme efforts to go further can also be hampered by the quality of data on ESG activities, Ms Nikulina said: “It’s not only about quality of data, but also the scope of this data. When you report the carbon footprint, do you report it only for your business or is it the impact of that?”

Maria Nazarova Doyle, head of pension investment at Scottish Widows, said: “Shareholder engagement has been on the rise in the recent years and these efforts have achieved some notable progress, particularly on climate-related issues. It would be fair to say that the focus has been more on high emitters like coal miners, oil majors and utility companies generating energy from fossil fuels. These efforts have been quite effective, and the focus now needs to shift to other sectors like transportation in recognition that we need the whole economy to achieve the Paris Agreement targets.”

She added: “In addition to shareholder engagement, regulations and restricted access to financing work well in driving positive change. If we see more of this in the transportation sector, we will see quicker progress. It is important to recognise though that even in our ambition to achieve net zero, it will still be a net position, meaning that some emissions may be unavoidable and would need to be offset or directly removed. So the focus of engagement with high-emitting transport companies in the coming years should be on the absolute emissions reduction and having tangible short to medium term plans to achieve this, recognising that “leftover” emissions would still need to be offset in a longer term 2050 view.”