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01/02/2021

IBA's Aviation And The Environment, February 2021

In response to widespread demand, IBA’s Tim Boon delivers an update on sustainable aviation finance and green initiatives for 2021. This popular report provides the latest on ESG regulation and compliance, green financing initiative and new developments in SAF and OEM advances.

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IBA’s Aviation and the Environment Report provides comprehensive insight on:

 

  • Current regulation and compliance information and sustainability reporting standards, including ICAO’s Carbon Offsetting Reduction Scheme for International Aviation (CORSIA) which is scheduled to commence in 2021.

  • Emerging green finance initiatives including green bonds and sustainability-linked loans.

  • OEM investment and research activity and further developments in the use and certification of Sustainable Aviation Fuels (SAF).

  • IBA’s new InsightIQ Carbon Emission Calculator (CEC) which combines IBA’s adjusted fuel burn calculations with fleet, flights and utilisation data to deliver carbon calculations by any combination of: Time period / Airline / Lessor / Aircraft Model / OEM / Country / Airport / Route Pai

 

An executive summary of this comprehensive report can be viewed below or a complimentary copy of the full report can be downloaded using the button.

Environment Report

 

In January 2020, we published our well-received ‘Aviation and the Environment’ report against a backdrop of intense interest in sustainability and environmental protection in aviation. Then Covid-19 happened and, inevitably, attention shifted to operational issues and survival. Glasgow hosts the 26th UN Climate Change Conference in November. As our industry recovers from the pandemic’s effects, increasing pressure will be exerted to fulfil Paris Climate Accord commitments, the ultimate target being to keep global warming to two degrees Celsius or lower by 2050. The OECD (Organisation for Economic Co-operation and Development) estimates it will take around US$ 7.72 trillion annually to even meet the Accord’s 2030 goals.

 

IBA has updated its first report to simplify some key guidelines for the sector and to explain initiatives and new technologies being developed to achieve lower carbon emissions. There are many routes towards sustainable operation, each with unique challenges, be they obtaining enough sustainable aviation fuel (SAF), procuring meaningful carbon offsets, or ensuring ESG (Environmental, Social and Governance)-compliant fleets and operations. Investors and financiers also need to satisfy an increasingly ESG-orientated market.

 

Green Financing

Demand for ESG or sustainable investing is growing, the pandemic generating increased interest in more risk-averse investments. ESG portfolios typically create smaller yields than traditional investments; the bias is weighted towards risk-adjusted growth. Green bonds focus on raising capital for climate or environmental projects and studies indicate some have received green premiums, ‘greeniums’, due to increased demand.

 

Sustainability-linked loans differ; their pricing is pegged against the environmental performance of the borrower based on pre-determined criteria. The loan’s proceeds can be used for wider business projects. Though we’ve seen an uptake in sustainability-linked loans, it’s inherently difficult to integrate green financing into aircraft asset funding due to the relative carbon-intensity of our sector.

 

JetBlue’s $550 million revolving credit facility with BNP Paribas last year links its pricing mechanism to the airline’s ESG performance. Meanwhile, Etihad Airways has secured two sustainability-linked loans since 2019 and, outside airline ESG financing, interest in sustainability-linked loans for airports has also grown.

 

To download a copy of the full report, please click the button below.

Environment Report

 

Sustainability Reporting Standards

Given the aviation industry’s financial position, an airline’s management structure must be robust, diverse and adequately prepared to address future challenges. Does it publish reports following Global Report Initiatives (GRI) standards? Does its board recognise the Task Force on Climate-Related Financial Disclosures (TCFDs) recommendations? These are key metrics in an analysis of the long-term exposure of any new debt issuance and the resultant ESG ratings. What do they mean?

 

  • Task Force on Climate-Related Financial Disclosures: Recommendations are set around four key areas: Governance, Strategy, Risk Management and Metrics and Targets. They clarify how climate change could impact the organisation’s future financial position

  • Climate Disclosure Project: The CDP disclosure standards measure and manage climate change risks and opportunities, water security and deforestation. CDP helps build and protect an airline’s reputation; trust results from responding transparently to rising environmental concerns

  • Global Reporting Initiative (GRI): Uses interlinked topics to produce transparency in business operations and reporting. It spotlights environmental impacts but its extent is a ‘sustainability in business operations’ approach. Governance, Employees, Safety, Suppliers, Shareholders and Environment are covered

 

Historically, an airline operating at ‘net zero emissions’ meant it had bought carbon credits or invested in carbon-offsetting projects such as reforestation and forestry protection. New forests can sequester considerably less CO2 than originally estimated, however; they may, in fact, decrease the native forest’s biodiversity and affect carbon emissions little. Although such projects can have a positive impact, available landmass to meet offsetting targets is limited.

 

Government bailouts have set strong sustainability targets. For example, Air France / KLM have received €7bn in state aid, as part of which Air France must permanently scrap all short-haul flights less than 21⁄2 hours. TGV high-speed rail services can operate at a lower carbon cost.

 

Despite these measures, opinions are divided. Many agree the air transport industry, its jobs and the mobility it affords are essential and, while some governments used Covid-19 to financially incentivise airlines to meet sustainability targets, others prioritised the prevention of airline failures. The balance between recovery and reducing the industry’s environmental impact is difficult to achieve.

 

This year was to see the International Civil Aviation Organisation’s (ICAO) Carbon Offsetting Reduction Scheme for International Aviation (CORSIA) launched. Designed as a single, global market-based measure to complement governmental actions for carbon-neutral growth in aviation, CORSIA applies only to international flights. Participating states must monitor, report and verify their emissions, offsetting any above the baseline figure by purchasing carbon credits.

 

ICAO was to use CO2 emissions data between 2019 and 2020 as a baseline. However, given the significant drop in air travel and emissions in 2020, a sizeable distortion would have resulted and pressure from IATA and airlines convinced the ICAO to use only 2019 data pending a review in 2022. Since global RPKs may not recover to 2019 levels until 2024, the delays will place further pressure on CORSIA’s integrity. Airlines can postpone buying offset credits and meaningful implementation of a functional carbon trading scheme under CORSIA will suffer.

 

To download a copy of the full report, please click the button below.

Environment Report

 

What will aircraft design and propulsion look like?

Battery-powered aircraft concepts are being researched but the leading OEMs have yet to make concrete commitments to pure electric aircraft owing to their lack of energy density versus weight penalties over intercontinental routes. There is a place for electric propulsion, however; it has great potential for short regional flights since smaller-capacity cabins can operate from airports and aerodromes that would not typically accept commercial traffic. They are quieter, cheaper to operate and emit fewer pollutants. One example is UK-based electric aircraft start-up Faradair. Its aircraft is slated to carry 18 passengers or five tonnes of cargo and is hoped to be a cost-effective option for operators wanting to fly from local airfields at a price-point currently unmatched through traditional airport hubs.

 

Airbus made clear in September electric propulsion is not a prime focus of its forthcoming product line, underlining it does not yet meet the industry’s medium- to long-haul demands. Instead its committed to both hydrogen and synthetic fuels for its next generation commercial aircraft; its three conceptual aircraft designs are codenamed ‘ZEROe’.

 

If the technology can be harnessed, hydrogen propulsion could be a ‘silver bullet’ for emissions reduction but sweeping airport infrastructure changes and new fuel-production facilities will be needed to meet demand. These could potentially take longer to mature than the aircraft themselves.

 

The industry will not see far-reaching changes to new aircraft offerings short term. Rather, developments in the use and certification of Sustainable Aviation Fuels (SAF) will continue. Most recently, Rolls-Royce announced ground tests on next-generation engine technology to demonstrate current engines can operate on 100% SAF as a full ‘drop-in’ option. Currently, SAF is certified only for blends of up to 50% with conventional Jet-A. IBA has seen a significant uptake in commitments to SAF offtake agreements between operators and producers and Boeing has pledged all its new commercial aircraft will run on 100% SAF by 2030. Despite acknowledging it’s conducting further feasibility studies of hybrid-electric and hydrogen propulsion systems, Boeing’s confirmed SAF is its main focal point for the next decade.

 

Using unblended SAF can reduce net CO2 lifecycle emissions by more than 75% against conventional jet fuel. However, the Lifecycle Emissions Value (LSf) is based on emissions from production to combustion rather than pure exhaust emissions. Emissions reduction relies upon the feedstock used, how the feedstock was produced and the fuel-conversion process employed.

 

The aviation industry must understand the realities of SAF and its relative immaturity in the marketplace. For SAF to significantly influence CO2 reduction, its production rate must rapidly increase to meet fuel demands. The world’s largest producer, Neste, has an annual capacity of 100,000 tonnes for a market whose annual jet fuel consumption is 297 million tonnes. According to IBA’s projections, global annual SAF production will reach 30 million tonnes by 2035 and supply circa 7% of the global fleet.

 

The next few decades will see the aviation industry shift towards a cleaner, carbon-neutral future. However, there are significant challenges to scaling up the technologies to meet our globalised industry’s needs. A substantial blend of new technologies in propulsion and energy supply will need supporting in parallel with high quality carbon-offsetting schemes if the industry is to meet its targets.

 

To download a copy of the full report, please click the button below.

Environment Report

 

If you have any questions or would like to discuss any aspect of the report or your sustainability need with IBA in more detail, please get in touch.

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