Pegasus Guidelines adopt ‘open-source’ approach to attract new banks

This article is published with permission from Ishka Global. Authored by Analyst Justine El Amrani-Joutey and Senior Analyst and Sustainability Lead Eduardo Mariz, it takes a deeper dive into the Pegasus Guidelines, launched officially on April 4th 2024, reviews key developments since its evolution in 2022 and considers whether aviation financiers now have a standard methodology with which to drive sustainability-linked initiatives.

The long-awaited Pegasus Guidelines for aviation (not Pegasus Principles) were officially launched this week on an open-source basis, culminating a two-year effort by five major banks to create guidance on emissions intensity and climate alignment target-setting. The 62-page Pegasus Guidelines for the Aviation Sector are now freely available on the RMI website, and the founding members are inviting more banks to adopt the methodology.

Inspired by the shipping industry’s Poseidon Principles, the guidelines offer banks a framework to independently evaluate and disclose the emissions associated with their aviation lending portfolios. Ishka last examined the work of the Pegasus Working Group (at the time referred to as the Aviation Climate-Aligned Finance working group, or ‘Aviation CAF’) last October, and there have since been several significant changes to the organisational structure as originally devised. Ishka explores the latest changes and road ahead for the Pegasus Guidelines.

From ‘Principles’ to ‘Guidelines’

The main change to the initiative has been a departure from the Poseidon Principles’ membership-based structure. At the Pegasus virtual launch on 4th April, RMI founding members confirmed that the guidelines will now be an opt-in “open-source” methodology with “less administrative overhead for financial institutions.”

Financial institutions can freely and independently implement and reference the Pegasus Guidelines. “There’s no cost associated with adopting or applying the methodology for financial institutions. All that we ask is that institutions use it in its whole as it’s written and attribute the fact that they’re using it,” commented Nicholas Halterman, RMI senior associate on the project.

Halterman said that, as a result of these changes, the principles have now become “guidelines,” to reflect their “lighter touch administrative structure.”

Initial adoption of the guidelines

In addition to the five Pegasus Guidelines Working Group founding members (Société Générale, BNP Paribas, Citibank, Standard Chartered, and Credit Agricole CIB), two new banks recently adopted the Pegasus Guidelines as users: CaixaBank and CIC. Additionally, Export Development Canada (EDC) and ING are testing implementation and considering adopting the Pegasus methodology. Bank of America, a founding bank of the working group when it launched in April 2022, is no longer involved in the initiative.

Yann Sonnallier, Société Générale’s global head of aviation finance, noted that the launch of the guidelines was “right on time” for its own Net-Zero Banking Alliance (NZBA) disclosure deadline of Q2 2024. As recently highlighted by Ishka, other banks are likely in a similar situation and many may be considering the adoption of the Pegasus Guidelines in the coming months.

Banks contemplating the adoption of the Pegasus Guidelines could also include Deutsche Bank, which in its latest annual report referred to its decarbonisation target as “provisional” pending the approval of the Pegasus Guidelines. Jonathan Howard, managing director for aviation at Standard Chartered, further empathised that the methodology was particularly aimed at “NZBA signatories” as it will “assist in fulfilling the NZBA obligations”.

The role of SAF

One of the most salient aspects of the Pegasus Guidelines methodology is its choice of a well-to-wake emissions scope, which considers not only tailpipe emissions, but also fuel production and distribution, where SAF produces the largest emissions savings.

When asked whether effective investments in SAF and other decarbonisation technologies would be included in the methodology, Sonnalier said “it had been evoked” and that including effective investment in SAF and other decarbonisation technologies would be a key topic of a future “2.0” version of the Pegasus Guidelines.

Another important question raised during the launch was whether banks could reasonably expect airlines in their portfolios to reach the 13% SAF by 2030 usage target in the reference scenario. The Mission Possible Partnership (MPP) Aviation Transition Strategy’s Prudent (PRU) scenario outlines that 13% of final jet fuel demand needs to come from SAF by 2030. Bertrand Dehouck, head of transportation capital markets at BNP Paribas, responded saying there are other ways to meet intensity reduction targets if airlines are not able to attain that level of SAF usage.

Credit Agricole CIB’s José Abramovici used as a reference the mandated 6% SAF blend at EU airports by 2030, which according to the bank’s “assumptions” would be enough for one of its portfolio airlines to reach their decarbonisation targets on account of other levers such as airspace optimisation.

The compatibility of the MPP roadmap with airline strategies

Emissions intensity is not the only benchmark encouraged by the Pegasus Guidelines. The standard also includes a Portfolio Alignment Score (PAS) which could be disclosed in parallel or instead of emissions intensity by banks adopting the guidelines. The PAS captures the delta between emissions intensity and the reference scenario, the MPP’s PRU Roadmap. RMI defended the choice of the MPP roadmap (the creation of which was also supported by RMI) citing their alignment with the Science Based Targets Initiative (SBTi) – whose aviation sector work has been instrumental to many airlines’ decarbonisation strategies.

Abramovici highlighted that the MPP roadmap aligns “with SBTi methodology in terms of the choice of metrics and the emissions and traffic scoping”. Abramovici further mentioned that the SBTi and MPP roadmap are very close to each other, and that “in the near future, these two roadmaps may be aligned”. Ishka notes that since 2022, the MPP and the SBTi formed a technical collaboration to enhance the compatibility of the SBTi Sector Projects and MPP Sector Transition Strategies.

The Ishka View

The Pegasus Guidelines represent a major step by aviation-specialised banks in their effort to capture and benchmark aviation emissions intensity reductions, and make lending allocations informed by those metrics. As long as lenders remain committed to their Net Zero 2050 targets and accompanying disclosure commitments, Pegasus may be a major force shaping lending appetite for aircraft types, airlines, lessors, and the sector as a whole – as long as they are widely adopted by major banks.

The launch of the Pegasus Guidelines (delayed from an initial target of January 2024) has not yet been accompanied by the desired level of backing from banks. The initiative has one fewer bank among its Working Group members than it did at launch, and the seven institutions currently committed to implementing the guidelines compare to the 11 founding signatories of the Poseidon Principles at launch in late 2021. This may partly explain the initiative’s new organisational structure, designed to be more readily implementable and without costs for new banks.

Specifically for lessors, the Poseidon Guidelines have the potential of constraining lending towards leasing platforms – or portfolios – that lag peers in their emissions intensity metrics.  The guidelines’ “look-through” approach to lessor lending evaluates aircraft based on the operating airline, regardless of whether the aircraft is leased or directly owned by the operating airline. Under this methodology, an aircraft-secured facility to a lessor in which the aircraft are leased to an airline is equivalent to an aircraft-secured facility for the same aircraft provided directly to the airline.

This means that lessors wishing to remain ‘attractive’ from an emissions standpoint to banks adopting the Pegasus Guidelines will need to be conscious of how their lessees operate their assets, including their usage of SAF. Consultation participants of the initiative included several large leasing firms (Avolon, Aviation Capital Group, SMBC Aviation Capital, and DAE Capital).

This article was originally published by Ishka SAVi, Ishka’s aviation sustainability intelligence platform.

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