The EU’s Taxonomy Will Define Aviation Transition Linked Leasing and Finance
The EU taxonomy has been designed to ensure avoidance of greenwashing within the finance sector and encourage emissions reduction of carbon intensive industries in line with the 1.5°C ambition of the Paris Agreement, the ‘European Green Deal’ and the EU’s ‘Fit for 55’ initiatives.
The aviation taxonomy is likely to determine the future composition of European airline fleets and therefore aircraft financiers’ and lessors’ aircraft portfolios. The taxonomy is likely to encourage new leasing and finance structures that will create additional sales and marketing opportunities.
Opportunities to create new transition linked finance and leasing structures will benefit both aircraft owners and operators.
The Platform on Sustainable Finance report (Part A Methodological Report and Part B – Annex: Technical Screening Criteria) was published by the European Commission on 30 March 2022. The relevant sections for aviation are contained in the following sections of Part B of the report:
- 2 Manufacturing of aircraft
- 3 Leasing of aircraft
- 4 Passenger and freight air transport
The taxonomy screening criteria is open to a four-week public consultation, scrutinization under the EU’s co-legislation process and transcription into a Delegated Act before the end of 2022.
Aviation Taxonomy Development and Scope
The original screening criteria for the aviation sector was published in August 2021 following the EU’s commissioning of an independent review of aviation emissions abatement, referred to as the Steer Report (February 2021).
The scope of the original screening criteria was limited to the manufacturing of aircraft and commercial air transport, including renting and leasing of aircraft. The current revised screening criteria published in March 2022 expands the scope into three clearly defined sections, the manufacturing of aircraft, the leasing of aircraft and finally, passenger and freight air transportation covering the purchase, finance and operation of commercial aircraft.
The taxonomy recognises that aviation emissions are difficult to abate and therefore cannot be classified as ‘sustainable’. Instead, the taxonomy encourages a transition to a cleaner environment, including zero emission aircraft, re-fleeting of portfolios to ‘best in class’ aircraft types and increasing the utilization of sustainable aviation fuels (SAF). Business jets are not included in the taxonomy unless they operate on 100% SAF from the outset. From 2028 to 2032, all aircraft will be required to operate on 100% SAF.
Originally, the screening criteria for commercial aircraft required (until the end of 2027), that for each new ‘best in class’ aircraft delivered, an older non-compliant aircraft would need to be scrapped, ensuring that there is no net increase in the average fleet size over a ten-year period. With respect to aircraft leasing, the ‘scrappage scheme’ has now been amended to allow for the sale of aircraft as well as the decommissioning of aircraft from a lessor’s portfolio.
The current proposals are as follows:
The taxonomy disqualifies any non-taxonomy compliant aircraft from being introduced into a lessor’s portfolio within six months of a new aircraft delivery. Likewise, a non-compliant aircraft will be required to be removed from a lessor’s portfolio within six months of delivery of a new aircraft.
The taxonomy includes three classes of aircraft:
- Aircraft of greater than 5.7t and less than or equal to 60t maximum take-off mass, certified to the ICAO CO2 standard with a margin of at least minus 11% to the ICAO New Type
- Aircraft of greater than 60t and less than or equal to 150t maximum take-off mass, certified to the ICAO CO2 standard with a margin of at least minus 2% to the ICAO New Type
- Aircraft of greater than 150t maximum take-off mass, certified to the ICAO CO2 standard with a margin of at least minus 5% to the ICAO New Type limit.
The decommissioning and sale of older aircraft must fall within a weight limit of at least 80% of maximum take-off mass (MTOM) of the new delivery. For example, the taxonomy would allow the an A319-200ceo (75.5 tonnes) to be replaced with an A320neo (79 tonnes) but not an A321neo (97 tonnes). The taxonomy also encourages the recycling of decommissioned aircraft parts into new aircraft production and thereby encouraging development of a circular economy.
A number of questions remain with respect to the taxonomy including:
- To whom a leased aircraft can be sold
- Carbon reduction alignment with EU Fit for 55, science-based targets and KPIs
- The requirement for increased use of SAF which is beyond the operational control of aircraft financiers and lessors
Details of taxonomy derived transactions will be required to be included in sustainability reports and investor updates on a report or explain basis. Compliance will encourage aircraft lessors and lessees to operate ‘best in class’ aircraft types that will be capable of running on 100% SAF. Taxonomy aligned leasing and finance is likely to provide early adopters with a distinct advantage over competitors offering non-taxonomy compliant aircraft and financial products.
The taxonomy has been welcomed by European airline groups as they are becoming increasingly reliant on the aircraft finance and leasing communities to provide carbon emission reduction incentives and solutions. It is expected that a UK taxonomy will closely follow the EU taxonomy rules.