Environmental, Social, and Governance (ESG) issues are now seen as a key risk to investments in aviation, and authorities across the world are demanding more transparency and stricter reporting standards. It’s never been more important to understand the pathways to net-zero emissions, and their real term impacts on all key players across the industry. Each month, IBA’s ESG Consulting team will be sharing key insights and the latest news from the growing world of sustainable aviation.
The group followed up their inaugural sustainability-linked bond issued in January 2023 with a second transaction that is actively linked to ESG KPIs, described as a strong show of confidence from financial institutions. Air France signed a €1.2bn facility and KLM signed for €1bn: both were coordinated and concluded by a range of international banks. ESG metrics are embedded in the financing costs of the bond, which can be adjusted depending on the group’s performance against their sustainability targets. The indicators involved include reduction in unit CO2 emissions, usually CO2/RTK, and increase in the share of SAF, among others.
The recent prevalence of sustainability-linked loans is encouraging for an industry that could be in danger of facing difficulties in securing finance, because of increasing scrutiny on banks to minimise and disclose the impact of their debt issuance. IBA place the increasing confidence of lenders, in part, down to improving emission accounting procedures in aviation, which will continue as regulations such as CORSIA and the EU ETS begin to bite in the next few years. We expect to see growing appetite for ESG-linked finance costs from both operators and institutions, as both seek opportunities in this transitioning industry.
The multinational corporation is expanding its ecoDemonstrator programme to assess 19 different innovative technologies, in 2023. It was first launched in 2012, and by the end of 2023, nearly 250 new technologies will have been tested. Of these 250, roughly a third will have progressed to the company’s wider products and services. The programme uses a range of explorer planes to trial new sustainability and safety related technologies, such as flying on the highest available sustainable aviation fuel (SAF). Additionally, the programme also involves initiative such as arranging the aircraft’s routes for path optimisation across multiple different regions, factoring in variables such as weather and air traffic & airspace closures. Boeing believe that path optimisation across global airspace jurisdictions could achieve emission reductions of up to 10%.
While SAF is an important mitigator in the path to net zero aviation by 2050, IBA are optimistic that Boeing are expanding their pursuit into emission reduction technologies and avoiding a sole focus on SAF. The industry has largely centred its net zero goals on the use and scale-up of SAF, however, research has shown that there may not be enough feedstock available to produce SAF, and the current SAF infrastructure is severely limited. Albeit the recent introduction of aviation in the EU Taxonomy will promote investments and allow the industry to develop towards its goals (dependent on consultation feedback).
KLM have started a collaboration with AeroDelft students from the Delft University of Technology, to help work on Project Phoenix. The project aim is to build a hydrogen-powered aircraft and potentially contribute to the development of certification, regulations, and infrastructure. The Phoenix Prototype will take the form of a drone and will serve as a steppingstone in the development of the world’s first, manned, liquid-hydrogen electric aircraft. The Prototype will run on an electric motor powered by liquid hydrogen and fuel cell technology and has already completed its first flight. By 2024, the team aims to fly the drone using gaseous hydrogen, and by 2025, with liquid hydrogen.
There remain challenges associated with hydrogen flight. Hydrogen is significantly lighter than jet fuel therefore, it requires roughly four times the volume to achieve the same amount of energy. As a result, passenger capacity would be reduced to accommodate for fuel tanks on the aircraft. Hydrogen aircraft are promising, if achievable, due to water vapour being the only by-product produced and hydrogens energy efficiency in comparison to traditional jet fuel. However, sustainability issues remain. Hydrogen may not be wholly sustainable as it requires large amounts of electricity for production. If the energy source is not renewable, then hydrogen is no longer a clean energy source. Green hydrogen plants are under development, but IBA believe the progression of hydrogen-powered aircraft will unlikely flourish with ease.
Our team can support you with advice on sustainable finance, ESG ratings, ESG strategy and understanding emerging technologies. Our expert insight is supported by cutting-edge insights from our award-winning IBA NetZero platform.