Environmental and sustainability issues remained close to the top of the agenda at the Airline Economics and AirFinance Journal Dublin conferences last week. The overarching message was that ESG ambition, net-zero alignment and carbon emissions reporting has become a part of the licence to transact business in the aircraft finance and leasing sector.
Greenwashing is all washed-up
The message has matured to a point where it is no longer acceptable to say, “but aviation accounts for just two to three percent of total industrial emissions” or that “aviation emissions are difficult to abate”. Any talk of blame-shifting or hint of greenwashing had been quietly removed from the narrative. Following the industry’s post-Covid recovery, the aircraft finance and leasing industry has, with a few exceptions, started to take its environmental responsibilities seriously in a carbon constrained world.
Brave New World
Commitments and allegiances were made in 2022 to develop industry initiatives including the ALI Sustainability Charter, the Impact (on Sustainable Aviation) group of banks, investors and lessors, and the Climate-Aligned Finance (CAF) group of airfinance banks.
Investment banks are increasingly focussing on aircraft finance transactions through an ESG lens, be it for individual aircraft transactions or the provision of funding to aircraft lessors.
French investment banks including CA-CIB, Natixis and Société Générale have been leading the charge on sustainability linked aircraft finance transactions with a number of SLF transactions having already closed so far this year. Under its ‘Carbon Compass Methodology’, JP Morgan has committed to align its aircraft financing portfolio with the primary goals of the Paris Agreement, having targeted a baseline reduction from its current performance of 972.6g CO2 / RTK (2021) to 625g CO2 / RTK by 2030 – a 36% reduction. Other banks are looking to follow suit with similar emission reduction targets.
Impact published its first annual report (‘Year in Review 2022”) to coincide with the Dublin aviation finance conferences. Impact has made considerable progress on a methodology to decouple aviation CO2 growth from the industry‘s economic output. Meanwhile the CAF group of banks under the direction of the Rocky Mountain Institute is about to launch its methodology to set sustainable performance targets and KPI’s in line with a carbon reduction trajectory towards net-zero by 2050.
Whilst the ALI has yet to decide on how it aims to fulfil its charter commitments and obligations, the hot money appears to be on it adopting the Impact decoupling and airline emissions rating matrix methodology due to its simplicity.
Emerald Green Power
Lessors Avolon and ORIX announced their plans to skip a manufacturing process generation and move directly into Power to Liquid (P2F) SAF production in Ireland. AerCap also announced last November that it intends to enter SAF production but with no detailed plans published as yet. Another lessor (that remain nameless for now) is also seriously considering entering the P2F market and has commissioned a feasibility study.
Stand and Deliver
Since COP 26 in November 2021, those investors and fund managers that have signed up to the Glasgow Alliance for Net Zero (GFANZ) sector-specific alliances, are now having to ‘report or explain’ their portfolio annual Scope 3 emissions as part of their GFANZ membership commitments and obligations.
IATA has committed to ‘Fly Net Zero’, an initiative designed to achieve net zero carbon by 2050. ICAO has also agreed to a ‘Long Term Aspirational Goal’ (LTAG) of achieving net zero by the same year. The question is whether the two schedules will interline.
The initiatives undertaken by the aviation industry to self-regulate coincide with tightening European regulation under “Fit for 55” and climate change reporting standards. Mandatory reporting including the Taskforce on Climate Related Disclosures (TCFD) and the EU’s Corporate Sustainability Reporting Directive (CSRD), will in a short period of time, require nearly all aircraft lessors located in Europe (including foreign owned subsidiaries) to report the CO2 emissions. Lessors will be required to report CO2 emissions derived from their own activities (Scopes 1 and 2) and those of their airline clients (Scope 3) on an annual basis.
Aircraft owners and managers will also be required to report climate change risks and opportunities in their annual accounts under new accounting rules to be published by the International Sustainable Standards Board (ISSB) in June this year.
Don’t Look up!
Held during the same week as the Dublin aviation conferences, the World Economic Forum gathering continued to drive home the economic and societal risks faced by global warming. A scathing speech concerning the existential perils of climate change given by the UN Secretary-General António Guterres, set the tone for the week, in clear contrast to the number of private jets flying in and out of Davos.
Finally, Sweden has from 1 January taken on the Presidency of the EU and has vowed to complete all unfinished ‘Fit for 55’ business by 1 July. A rumour started to circulate in Dublin last week that the European Aviation Taxonomy was being dropped. Some in the aviation industry would certainly like to see it dead and buried, but it seems implausible that such as obvious source of emissions would be discarded from the taxonomy when every other industrial sector (including shipping) has been included. Expect Greta to lead the chorus of ‘S O S’. She’s bound to make any threat of weakening Europe’s climate change ambition her Waterloo.