COP26 – What All Aircraft Lessors Should Know

A new set of international financial policy measures was launched at the United Nations Climate Change Conference (COP26) in Glasgow in November.  The measures will require aircraft owners, managers, investors and financiers to implement robust ESG procedures.

The measures announced at the Finance Day of the COP by Mark Carney, the UN Special Envoy for Climate Action and Finance include:

  • Mandatory TCFD disclosure
  • Climate stress testing
  • Science based transition plans
  • Portfolio alignment
  • Frameworks to wind down stranded assets

The UN goal is to build a financial system in which every financial business decision takes climate change risk into account.

Mandatory TCFD disclosure

The Task Force on Climate Related Financial Disclosures (TCFD) provides information to investors and regulators about what companies are doing to mitigate the risks of climate change, as well as be transparent about the way in which they are governed. The TCFD was established in 2015 by the G20 Financial Stability Board. It consists of framework of measures under four pillars including governance, strategy, risk management, and metrics and targets.

Reporting under the TCFD has been voluntary but will now become mandatory for many businesses, particularly those that are regulated by central banks and financial regulators that are members of the Network for Greening the Financial System (NGFS).

For example, the Bank of England through the Financial Conduct Authority (FCA) will require all companies that have their main listing in London to make annual TCFD disclosures or explain why they cannot.

Financial institutions that have a TCFD reporting obligation will be required to collect aggregated annual ‘Scope 3’ emissions data derived from their portfolios in accordance with the TCFD.  Portfolio emissions will include finance provided to airlines and aircraft lessors for aircraft acquisition.  Aircraft owners will be required to provide carbon emission data to their financiers, investors and insurers enable them to complete their TCFD reports.


Climate Stress Testing

The transition to net-zero emissions can be orderly or disorderly. Orderly transition requires businesses to implement sufficient climate change measures early to achieve a successful strategy outcome for growth and prosperity in the future.  A disorderly transition means doing nothing now, but the lack of any early and decisive climate related intervention may result in serious disruption and existential consequences for the business in the future.

Central banks and regulators are becoming increasingly concerned about climate change related systemic risk building up in the financial system.  Therefore, NGFS financial regulators are not only requiring the completion of annual TCFD reports, but some are also requiring financial institutions to undertake a bi-annual climate change related scenario analysis.

For example, the Bank of England has implement a Climate Biennial Exploratory Scenario (CBES) to explore the financial risks posed by climate change for the largest UK banks and insurers.

The key features of the CBES are:

  • Three scenarios of early, late and no action built on a subset of the Network for Greening the Financial System (NGFS) scenarios: these are applied over a span of thirty years reflecting the longer-term nature of climate-related risks;
  • Sizing the risks participants face based on their current (fixed) balance sheets: for banks, the exercise will focus on their credit books, whilst for insurers, the exercise will assess risks to both their assets and liabilities;
  • Qualitative questionnaire: this will capture participants’ own views on their risks, their approach to climate risk management, and their potential management actions, and
  • Detailed counterparty-level analysis for the largest counterparties: the CBES asks firms to use novel modelling approaches to conduct a detailed, bottom-up analysis of their largest counterparties. For the remainder of counterparties, firms are expected to differentiate exposures by geography and sector.

Aircraft acquisition requires long-term finance and therefore aircraft are at risk of becoming stranded assets should society’s sentiment towards flying continue to change.  This scenario is referred to as ‘Transition Risk’.  A recent example of transition risk is the wholesale withdrawal of investment, finance and insurance for businesses that have significant investments in coal mining and coal fired power generation.  Insurers may therefore require aircraft lessors and managers to provide climate change disclosures in renewal submissions from next year.

Science Based Transition Plans

A growing number of financial institutions and companies are setting goals to achieve net zero emissions in their businesses and business relationships and developing climate transition plans to map out how they will change their strategy to achieve this. Many companies are using international methodologies, such as the Paris Agreement Capital Transition Assessment (PACTA) and Science Based Targets initiative (SBTi) methodologies for developing their commitments and related plans.

Science based transition plans specify at a high level what intermediate actions and emissions reductions targets will be required to achieve carbon reduction targets and key performance indicators. Any targets or transition plan reporting may need to be combined and will certainly require alignment with the company’s TCFD reporting.

Over the next five years, target setting or publication of a transition plan and related disclosures may well become a regulatory requirement in key markets, including the UK and USA. The TCFD latest consultation also extends to targets and transition plans, and in the EU, taxonomy reporting requirements under Article 8 of the Taxonomy Regulation include production and disclosure of a five-year capital expenditure plan. It would therefore make sense for aircraft owners and investors to start preparing for disclosure now.

An example of transition in aircraft finance is the recent British Airways EETC and related JOLCO financing of seven new Airbus and Boeing aircraft.  This is the first time that an EETC has been aligned to a sustainability-linked structure.  The transaction is tied to SBTi key performance indicators aligned to the flight fuel efficiency of British Airways and its subsidiaries, measured by the average grammes of gross carbon dioxide emitted per equivalent passenger per kilometre (gCO2/pkm) of flights during 2025.

Portfolio Alignment

The Glasgow Financial Alliance for Net Zero (GFANZ) was launched in April 2021 by Mark Carney, bringing together existing and new net-zero finance initiatives in one sector-wide coalition. GFANZ provides a forum for leading financial institutions to accelerate the transition to a net-zero global economy and members currently include over 450 financial firms across 45 countries responsible for assets of over $130 trillion.

GFANZ is focused on broadening, deepening and raising net-zero ambitions across the financial system and demonstrating firms’ collective commitments to supporting companies and countries to achieve the goals of the Paris Agreement. GFANZ also supports collaboration on steps firms need to take to align their portfolios with a net-zero future.  Members include banks, insurers, pension funds, asset managers, export credit agencies, stock exchanges credit rating agencies, index providers and auditors.

GFANZ is the gold standard for net zero following stringent and rigorous science scenarios-based targets towards 50% emissions reductions by 2030 and net zero by 2050.  Members are required to produce five-year emissions reduction plans and progress is required to be published annually.

Citi and Blackrock announced in Glasgow that aviation will be one of the first industry sectors that GFANZ will review with respect to accelerating emissions reduction and portfolio alignment.

Frameworks to wind down stranded assets

The UN has set out a framework of objectives and deliverables to build a financial system in which every decision takes climate change risk into account. The framework of four goals and 24 deliverables serves as a benchmark by which central banks, regulators and financial institutions can measure their performance.

One of the key objectives of the framework is to reduce the risk of creating stranded assets that could lead to systemic financial exposures and economic downturns.  The Paris Agreement Net Zero target will require the phase out of fossil fuels and therefore the financial system will need to transition investments away from existing fuels towards sustainable energy and circular economies.

For the aviation sector, this will mean the phasing out of kerosene fuels and developing sustainable aviation fuels (SAF) and other means of propulsion.  Alternative fuel and power solutions under consideration (SAF, synthetic fuels, hydrogen and electric) will incur additional costs until they can be produced at scale.  Sustainable fuels will also incur substantial infrastructure development costs that will need to be financed, whilst the cost of fossil fuel derived JET A1 may also be impacted as aviation transitions towards sustainable sources.

Mid-life aircraft could be at risk of becoming stranded asset as they are more fuel intensive and may have limitations with respect to the use of SAF.  Currently SAF can only be blended to a maximum of 50% of fuel uplift. This is because older engine technologies rely on aromatics contained in kerosene to lubricate and treat components and therefore older engines could become more susceptible to wear, tear and breakdown if using higher blends of SAF.  State of the art engines such as the RR Trent 1000 are currently being tested to use 100% SAF.  One problem with the delivery of SAF is that it is currently co-mingled and bunkered with standard jet fuels at airports.  This means that the uplift of SAF blends beyond 50% may require separate storage and delivery.


Transition to a sustainable economy is underway and is likely to increase airline operating costs at a time when airlines are continuing to suffer from the effects of Covid.  For example, the cost of compliance under the EU Emissions Trading System has increased three-fold in two years and the price of EU Allowances has recently spiked above €90 per tonne.  To add to their woes, airlines will be required to purchase 100% of their allowances from 2027, as free EU ETS allocations (currently averaging around 50% or amounts due for annual surrender) are to be phased out over the next four years.

Climate change risk has only just started to be factored into aircraft finances and leasing.  Significant credit risks including fleet lien exposures arising out of ETS/CORSIA non-compliance has not being factored into credit and operational risk assumptions due to a lack of data.  The abundance of new and often naïve capital seeking yields in the aviation sector could result in a ‘Minsky Moment’ and therefore result in systematic and existential risk to the sector.  These are risks central banks and regulators are planning to avoid.

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