Responsible investment has been core to Newton’s investment approach since our inception in 1978, when we began actively voting on our clients’ shares. Since then, our responsible investment approach has grown to include environmental, social and governance (ESG) integration and active engagement across all our strategies. This is done to identify risks and opportunities which have the potential to affect companies’ performance over the long term. As part of this process, equity securities which our research analysts wish to recommend must have an in-depth ESG quality review completed by our responsible investment team. In this context we conducted a review of Ryanair in 2016, which has since been updated twice.
What were the red flags?
At the time of investment consideration, a number of governance concerns were identified at Ryanair. The board was just 9% independent, which does not meet UK Corporate Governance Code standards. Its membership included just one female, and two-thirds of the board was comprised of Irish nationals; to us, this demonstrated a lack of diversity. In recent years, a light has been shone onto this issue as an increasing amount of research suggests that a lack of diversity can negatively affect a company’s financial performance.
These concerns were heightened as Ryanair’s CEO is notoriously outspoken and known for having a turbulent relationship with trade unions. The role of the board is supervisory, and, as investors, we seek to gain assurance that it provides sufficient and healthy challenge to the management of a company. However, in the case of Ryanair, we were concerned that a board lacking independence and diversity would not offer this challenge to the CEO.
Remuneration is an issue that has attracted considerable investor attention in recent years. As an investor, we are encouraged by transparent disclosures by companies and evidence that remuneration is used to incentivise long-term, strategic thinking. However, Ryanair disclosed little information in relation to executives’ bonuses or the long-term components of their pay, raising questions on how they were being incentivised to run the company over the short and long term.
Employee relations were also identified as a potentially material issue following extensive labour disruptions.
Ryanair has a seasonal schedule whereby the number of flights is increased or decreased owing to varying demand throughout the year. As a result of this seasonality, the company does not ensure that employee compensation agreements remain constant across this time. On the upside, this has led to lower labour costs and lower fares, benefiting both the company and investors; however, on the downside, this leads to an unhappy workforce which feels increasingly unable to engage with management.
Tensions have been further inflamed by failed union negotiations across multiple European countries, where unionisation levels are high and company engagement is commonplace. As a result, we were aware of a potential risk to the company’s bottom line. Customer demand for low-budget, short-haul flights is known for its flexibility – customers are likely to pick the cheapest and most convenient options for their journey. This can lead to considerable surges and falls in demand. This means that well-timed industrial action can cause major disruptions.
This risk materialised between 2014 and 2016, when, following increased media coverage, Ryanair saw strikes in Norway, Sweden, Spain, Denmark and France, and was fined €8.3 million over labour-law violations in France. The company was also forced to cancel up to 50 flights a day, affecting an estimated 400,000 passengers.
These workforce tensions continued. On 12 October 2018, following Ryanair’s decision to close bases and reduce fleets, the European Cockpit Association accused it of declaring war, and called for the management and board of directors to “change [their] confrontational and counterproductive approach”. The company maintained that this action was in response to rising oil prices and declining fares, which many of the low-budget airline companies are experiencing.
How do we integrate ESG research into investment decisions?
After discussing these concerns with our sector analyst, our ESG research was circulated to our investment team. This flagged our concerns to the portfolio managers and made sure that this analysis formed part of their overall investment decision.
This example demonstrates how a company’s handling of ESG risks can negatively affect its financial performance. It also highlights why we undertake ESG analysis before recommending all companies for investment.
How have we engaged with Ryanair?
Since investing in the company, we have sought to engage constructively with Ryanair, taking a twofold approach. First, we have engaged with the company to better understand how it is managing risks associated with labour and union relations. This has included our work as part of the Workforce Disclosure Initiative (WDI), a collaborative investor group aiming at improving public information and data around company workforces and supply chains. We have also engaged with the company to obtain information regarding remuneration practices, and on succession planning at the board level, to inform our views on corporate governance, and the effectiveness of the board more specifically.
Secondly, investors can engage for influence, and we have used our engagements with Ryanair to make constructive suggestions, and openly share our feedback and concerns. On remuneration, we have expressed our dissatisfaction at the granting of shares to independent directors, which can compromise their independence. We have been pleased that Ryanair has subsequently agreed not to repeat this practice in the future, following investor feedback. In addition, we have pushed the company to address the root causes of the labour unrest, which resulted in operational, financial and reputational disruption. We have seen some improvements, such as the migration to local contracts, which presents benefits to employees, and the use of employee engagement surveys and feedback opportunities. The company also hosted its first annual ESG event in 2020, designed to improve transparency and communication with investors, and hosted a second in 2021.
Noting that these are all steps in the right direction, we most recently updated our ESG research on Ryanair in early 2021. Most significantly, transparency and relations with investors appear to have improved, with examples of instances where the company has actioned investor feedback, such as responding to the Carbon Disclosure Project (CDP) and agreeing to end the awarding of options to non-executive directors. There have also been positive changes made to board composition, all of which have been discussed internally and are reflected in our ESG analysis and scoring.
However, we will continue to engage with Ryanair on both corporate governance and labour practices, as there is room for further improvement. This will include continuing to engage both directly and alongside other members of the WDI, to encourage the company to disclose this material information.
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This is a financial promotion. These opinions should not be construed as investment or any other advice and are subject to change. This material is for information purposes only. Any reference to a specific security, country or sector should not be construed as a recommendation to buy or sell investments in those countries or sectors. Please note that holdings and positioning are subject to change without notice. Newton research performs ESG quality reviews on equity securities prior to their addition to Newton’s research recommended list (RRL). ESG quality reviews are not performed for all fixed-income securities. The portfolio managers may purchase equity securities that are not included on the RRL and which do not have ESG quality reviews. Issued in the UK by Newton Investment Management Limited, The Bank of New York Mellon Centre, 160 Queen Victoria Street, London, EC4V 4LA. Registered in England No. 01371973. Newton Investment Management is authorised and regulated by the Financial Conduct Authority, 12 Endeavour Square, London, E20 1JN and is a subsidiary of The Bank of New York Mellon Corporation.