Environment, Society and Governance (ESG) issues have not been forgotten during the global crisis, in fact they have grown in importance for all aviation companies as the industry commits to net zero targets for 2050.
At its 41st Assembly in Montreal in October 2022, the International Civil Aviation Organisation (ICAO) committed to a Long Term Aspirational Goal (LTAG) to achieve net zero CO2 emissions by 2050.
The ICAO agreement aligns with both the objectives of the Paris Agreement and the net zero CO2 emissions by 2050 resolution agreed by airlines at the 77th IATA Annual General Meeting in October 2021.
UK Transport Secretary Anne-Marie Trevelyan described the agreement as an “historic milestone, not just for the future of flying, but for the wider international commitment to achieve net zero”.
US Special Presidential envoy on climate change, John Kerry, also welcomed the deal: “Thrilled to see international aviation commit at [the ICAO] Assembly to a sustainable future with a long-term climate goal… to help put aviation on the path to net zero by 2050,” Kerry said on Twitter.
ICAO also agreed changes to its global offsetting scheme – the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA). The changes aim to ensure airlines worldwide will begin offsetting emissions from 2024.
“The significance of the LTAG agreement cannot be under-estimated,” said Willie Walsh, IATA’s Director General. “The aviation industry’s commitment to achieve net zero CO2 emissions by 2050 requires supportive government policies. Now that governments and industry are both focused on net zero by 2050, we expect much stronger policy initiatives in key areas of decarbonisation such as incentivising the production capacity of Sustainable Aviation Fuels (SAF). And the global determination to decarbonise aviation that underpins this agreement must follow the delegates home and lead to practical policy actions enabling all states to support the industry in the rapid progress that it is determined to make.”
Commenting on the changes to CORSIA, Walsh added: “The Assembly’s agreement strengthens CORSIA. The lower baseline will place a significantly greater cost burden on airlines. So, it is more critical than ever that governments do not chip away at the cement which bonds CORSIA as the only economic measure to manage the carbon footprint of international aviation. States must now honour, support and defend CORSIA against any proliferation of economic measures. These will only undermine CORSIA and the collective effort to decarbonise aviation,” said Walsh.
The path to net zero will be challenging for the aviation industry as a carbon emitter but the commitment and enthusiasm of all aviation companies is clear. All facets of the aviation sector are working to reduce their own carbon footprints and contribute to the wider goal of reducing overall industry carbon emissions by 2050. Airlines have been particularly visible in their efforts to reduce their emissions and their sustainability policies – from recycling to investment in green technologies – have been well-publicised and widely reported.
“There is huge momentum around ESG and it will accelerate throughout 2023 and 2024,” says Cowen’s Becker. “In 2018, there was almost no discussion outside Europe on ESG and how the industry will attain net zero carbon emissions by 2050. In the second half of 2022, there was a huge acceleration of airline companies agreeing with various producers to buy sustainable aviation fuel. The problem with SAF is it is very expensive and it’s not scalable. But that will change in the next decade. SAF – or a blend of SAF with fossil fuels – will probably be utilised for long haul flights. Short haul flights are another discussion.”
Restrictions on short-haul flights came to the fore at the end of last year when the European Commission published its support for French government efforts to temporarily ban internal flights between destinations that are less than a 150-minute train journey apart.
The Commission said in a 2 December statement that it “believes that France is entitled to consider that a serious environmental problem exists in the situation at issue, which includes the urgent need to reduce GHG [greenhouse gas] emissions”.
The Commission opined that the French law, which would halt the flights for three years, “could be justified under Article 20(1) of the Regulation provided it is non-discriminatory, does not distort competition between air carriers, is not more restrictive than necessary to relieve the problem, and has a limited period of validity not exceeding three years, after which it should be reviewed”.
The Commission said the French government had informed it “of its intention to introduce a temporary limitation subject to conditions on the exercise of traffic rights due to serious environmental problems” but added that it had “received complaints from airports and airlines that the French law would be “ineffective and disproportionate to the intended objective, that it would discriminate between air carriers and that its duration would not be limited in time”. France’s high-speed rail services mean shorter train travel times are possible compared to most other countries in the EU. The Commission said in its statement that “the French authorities anticipate that people will primarily switch to highspeed train rather than to coaches or cars”, citing available data that “seem to point to a historical preference for rail connections amongst the people who use air connections”.
Some suggest that short-haul flights could be replaced by new technology electric aircraft such as the new electric vertical take-off and landing aircraft in development, however as Becker points out there have few seats – four-six – which makes them an unrealistic alternative for shorter routes. “It is difficult for me to get behind battery-operated eVTOL aircraft, because they are so small – just four passenger aircraft,” she says. “They are designed to replace ground transportation. Shorter air travel routes will likely be operated by hybrid aircraft in the future.”
Transitioning to SAF
Many airlines have signed and publicised offtake agreements with Sustainable Aviation Fuel (SAF) producers to both to reduce their dependence on fossil fuels but crucially to secure access to SAFs due to the limited production. In the seven-year period since the first offtake agreement was signed in 2013 by United Airlines, which agreed to take 56.8 million litres from World Energy over a three-year period, a total of 27 offtake agreements have been signed worldwide.
The entire aviation industry expects SAF to play the largest role in decarbonising aviation, but supply remains limited and expensive.
IATA’s Walsh has urged ICAO member states to focus their efforts on “ways to incentivise an increase in SAF production capacity and thereby reduce its cost. The tremendous progress made in many economies on the transition of electricity production to green sources such as solar power and wind is a shining example of what can be achieved with the right government policies, particularly production incentives,” said Walsh.
The ICAO Assembly LTAG identifies several key areas of support for SAF, including requesting the ICAO Council to facilitate capacity building and technical assistance to states for SAF programmes, work with stakeholders to define and promote the transition to SAF, and facilitate access to financing for infrastructure development projects dedicated to SAF to develop the incentives needed to overcome initial market hurdles.
ICAO Member States have also been requested to: accelerate fuel certification and development of SAF including feedstock production, accelerate certification of new aircraft and engines to allow the use of 100% SAF, encourage and promote purchase agreements, support timely delivery of any necessary changes to airport and energy supply infrastructure, and consider the use of incentives to support SAF deployment.
IATA emphasised the criticality of effective implementation. “Governments must not lose the momentum that has driven the outcomes of this assembly,” said Walsh. “The costs of decarbonising aviation are in the trillions of dollars and the timeline to transition a global industry is long. With the right government policies SAF could reach a tipping point in 2030 that will lead us to our net zero goal. By the next Assembly the ‘aspirational’ characterisation of LTAG must be transformed into a firm goal with a clear plan of action. That means governments must work with industry to implement an effective global policy framework capable of attracting the financial resources needed to put aviation on an unstoppable track to achieve net zero by 2050. There is lots of work to do, and not a minute to lose.”
Many aviation companies are all supporting and investing in the transition to SAF. Most recently, in December 2022, Avolon announced that it had partnered with Boeing, ORIX Aviation, SFS Ireland, and SkyNRG, to conduct a feasibility study into the production of Sustainable Aviation Fuel (SAF) in Ireland.
A recent long-term air traffic forecast from European air traffic control provider Eurocontrol shows how aviation in Europe will grow over the coming decades along with estimates of net CO2 emissions and a pathway to how aviation can achieve net zero emissions by 2050.
“We expect the number of flights to grow by 44% between now and 2050, taking us up to 16 million a year – compared to 11 million in 2019,” said Eamonn Brennan, Director General, Eurocontrol. “Our report shows that we can achieve net zero by 2050 with a series of tangible measures requiring coordinated action by aircraft manufacturers, airlines, airports, fuel companies, ANSPs and, crucially, governments and regulators. Key will be the wide availability and uptake of Sustainable Aviation Fuels (SAF) as they will cover 41% of emissions in our base scenario. The implementation of the Single European Sky is really important – this can make a change in the near-term by 2030 in the region of 8%. Market-Based Measures (MBM) will continue to play a very significant role in helping to achieve the net zero objective, contributing 32%. Revolutionary technological changes, such as hydrogen aircraft will be in place but not at scale for large/very large transport aircraft; they are very important, but it will take longer for their impact to kick in.”
The report analyses how aviation can achieve the objective of net zero by 2050. It identifies four key elements in the sustainability transition: increasing production and use of SAF; evolutionary improvements to aircraft and engines; revolutionary new aircraft technologies, such as the deployment of electric and hydrogen-powered aircraft; and more efficient flights, thanks to improved air traffic management.
The report finds that the final step to reaching net zero CO2 will be additional measures such as carbon capture or market-based measures like the EU Emissions Trading System (ETS) which in the baseline scenario, will compensate for the remaining 32% of anticipated CO2 emissions.
Crucially the report notes that if aviation is stronger and more profitable, companies will be better able to invest in evolutionary improvements and revolutionary aircraft technologies as well as the roll-out of SAF. In the scenario of high growth, this could mean that these elements could contribute to reducing CO2 emissions by up to 76% in total compared to 60% in the base scenario.
We take this very seriously, both in the short term and for the long term, and our commitments to ESG impact our investment decisions every day.
Lessors lead the way
The aircraft leasing community is also taking a lead on aviation’s sustainability journey. In October 2022, Aircraft Leasing Ireland unveiled its ALI Sustainability Charter at its inaugural Global Aviation Sustainability Day. Based on the aviation’s pathway to net zero in 2050, the objective of the charter is to establish a framework for assessing and disclosing sustainability alignment for leasing portfolio and provide actionable guidance on how to achieve GHG reduction ambitions.
Airlines and many leasing companies have issued ESG reports, detailing their current emissions profile and pathway to net zero, as well as their efforts to improve social and governance aspects of their businesses. AerCap has published its ESG for several years now and remains committed to the sustainability journey but also to advancements of its own social and governance programmes. “We want to make an impact in the community we operate in,” says Aengus Kelly, who points to the company’s many scholarship programmes around the world – in the Faculty of Engineering at the International School of Engineering at Chulalongkorn University in Thailand and with programmes closer to home in Limerick and Dublin in Ireland. “We are encouraging more people, younger people, to come into the aviation business.”
On the governance side, AerCap is focused on maintaining a positive and close relationship between the board of directors, shareholders and the management function as well as the audit functions. “Well-run, durable business are built on process, procedures, policies, and strong audit committees,” says Kelly, adding that the most durable leasing companies are built on solid foundations from the ground up.
For the environment piece, Kelly points out that as the world’s largest purchaser of new technology assets in the world, AerCap is at the forefront in the move toward a more efficient world fleet and has set an ambitious target to achieve ~75% new technology aircraft by the end of 2024.
Avolon has also been at the forefront of the move to a more sustainable leased fleet. In its inaugural sustainability report, published in February 2022, Avolon provides explicit commitments on its fleet composition over the medium term for the proportion of new technology assets in its portfolio by 2025. “Our customers have disproportionate demand for new technology aircraft driven by their own ESG considerations and driven by consumer behaviour,” says CEO Andy Cronin. “We take this very seriously, both in the short term and for the long term, and our commitments to ESG impact our investment decisions every day.”
Avolon has also been through the Sustainalytics ratings process, which assesses companies on their management of ESG issues based on a scale from 100- 0, 100 being the highest risk. Avolon received an ESG Risk Rating score of 16.0, which is the low-risk category. Cronin regards Avolon’s rating as “a new benchmark for the leasing sector”.
Avolon has also made a highly publicised investment in future technology, with the investment in Vertical Aerospace and the order for up to 310 of Vertical Aerospace’s eVTOL aircraft, the VA-X4, with options for a further 190. At the end of 2021, Avolon confirmed that it had placed its entire orderbook “within months of that first order”.
“When we came across that opportunity, we saw a platform that had built a technology that was really interesting and really compelling but was low on its path to commercialisation,” says Cronin. “We felt that we could bring Vertical instant access to every airline around the world through our network of airline relationships, which would greatly accelerate its journey. That was actually a massive underestimation on our part. We did not fully appreciate the level of interest in airline boardrooms around the world in taking part, getting to know and being involved in this technology. How that evolves over time is yet to be seen and there remains a debate over where such aircraft fit, into the overall transportation ecosystem.”
Cronin sees demand around the world from airlines seeking to be first movers in the electrification of air travel but doesn’t see it disrupting the mainline fleet. “We have capitalised on this opportunity for early stage investment in what we believe will become a large business opportunity to deploy capital over the years. Is it going to interfere with mainline? No. Do we have a first-mover advantage into a new field of technology that can disrupt other modes of transport in time? Yes.”
Scenarios for the successful decarbonisation of aviation all involve the transition to alternative fuel – SAF has been discussed above and is the short-term solution – but a longer-term option may be the transition to hydrogenpowered aircraft.
Boeing and Airbus are investing huge sums in research and development to design and realise the next evolutionary stage for power air flight, which includes working with engine manufacturers to make the switch to hydrogen as a propellent.
In 2020, Airbus unveiled its three hybrid-hydrogen fuel cell-powered ZEROe concept aircraft; a 100-passenger turboprop (with a range of around 1,000 nautical miles), a 200-passenger turbofan (with a projected range in excess of 2,000 nautical miles) and a futuristic ultra-wide blended wing design. Although the first of these airframes is projected to enter service in a little over a decade, Airbus’ Chief Executive Officer, Guillaume Faury, confirmed in November 2022 that “a final decision on technology choices and aircraft configurations is expected by 2025”.
In November at the Airbus Summit, a raft of ventures was announced that will see Toulouse-based aerospace giant team up with a range of partners as part of its efforts to cut carbon emissions to zero by 2050. These ranged from car maker Renault to CERN - of hadron collider fame - as well as SAF producer Neste.
Airbus and Renault agreed to pair up to “accelerate both companies’ electrification roadmaps” and will work on the finer points of getting more life out of lighter batteries and seek the “best pathways to move from current cell chemistries to all solid-state designs which could double the energy density of batteries in the 2030 timeframe”.
Airbus’ UpNext subsidiary will also pair up with the European Laboratory for Particle Physics - or CERN, as it is better-known - to look into how superconductivity can contribute to the decarbonisation of future aircraft systems”.
The duo are to develop a Super- Conductor for Aviation with Low Emissions (SCALE) demonstrator, which they said “aims to promote the adaptation and adoption of superconducting technologies in airborne electrical distribution systems”.
How soon such a project could have an impact on carbon emissions remained unclear, but Raphael Bello, CERN’s director of finance and human resources, was confident the two companies’ technologies “have the potential to be adapted to the needs of future clean transportation and mobility solutions”.
The event also saw Airbus flag a memorandum of understanding (MoU) with Neste to advance the production and uptake of SAF, and would work with HyPort, ENGIE Solutions and the Regional Agency for Energy and Climate in Occitanie (AREC) “to support the development of one of the world’s first low carbon hydrogen production and distribution stations” at Toulouse-Blagnac airport.
In February 2022, Airbus’ ZEROe demonstrator (the first A380 MSN1) was launched “with the objective to test a variety of hydrogen technologies both on the ground and in the air” (although flight testing is not expected to commence before 2026).
It’s not just Airbus investing in the potential of hydrogen propulsion. FlyZero – a research project established in 2021 by the Aerospace Technology Institute (ATI) and backed by the UK government – has developed three concept aircraft (regional, narrow body and midsize) aiming to “show that hydrogen can be competitive on a mission energy basis with SAF powered aircraft”. And alongside speculative concepts, the conversion of existing airframes is already being considered. Cranfield Aerospace Solutions’ nineseat Britten-Norman Islander hydrogen retrofit programme (phase one of a four-part ‘Project Fresson’, funded by a £7.1m grant from the ATI) hopes to achieve a commercial product by 2025. In November 2022, Air New Zealand also announced its intention to replace 23 de Havilland Dash 8-300s with either hydrogen or battery powered aircraft in 2030.
In November 2022, Rolls-Royce and easyJet (with whom a partnership was signed in July) successfully ground tested a hydrogen-fuelled AE 2100-A (usually found in turboprop configurations) in what was considered a world first. Next up, “the partnership plans a series of further rig tests leading up to a full-scale ground test of a Rolls-Royce Pearl 15 jet engine”. From 2023, Rolls-Royce also promises “all MTU engines and conversion kits will be available for 100% hydrogen”; acknowledging that hydrogen “will offer options in shorter range segments and has the potential to progress onto larger segments as the technology is proven and hydrogen fuel becomes more readily available”.
Hydrogen is a compelling option to give lift-off to zero-emissions jets, the problem is the storage tanks, which would need a complete overhaul since they need to keep hydrogen fuel at a constant -235 degrees. Airbus technicians have come up with a prototype tank which they are testing with nitrogen, for which a temperature of -196 will do. The aim is to have a hydrogen fuel tank ready to install in a demonstration A380 by 2026-28.
Speaking in November, Boeing CEO Dave Calhoun said that he didn’t think that hydrogen was the answer. “We don’t think hydrogen’s the answer,” he said. “It doesn’t mean we’re not going to work on hydrogen. We’ve got a long history of working on it. But I don’t think hydrogen is going to get us from here to there in the 2050 timeframe.” The main obstacles Boeing sees with hydrogen as a fuel source is safety and infrastructure. Christopher D. Raymond, Chief Sustainability Officer & Senior Vice President, Global Enterprise Sustainability at Boeing, said that the main problems were safety, loading it, transporting it, refuelling it, controlling temperature, controlling pressure, as well as infrastructure, airports and airplanes. He adds: “We spend a lot of our time thinking about airplanes like the future flight concepts and how our planes would have to be configured. But our view is, if we’re serious about reducing the carbon emissions by 2050, we need a lot of fleet renewal with these more Fuel-efficient airplanes. We need to scale sustainable aviation fuel in this industry. And more green hydrogen could be used as a very effective ingredient in sustainable aviation fuel production to make it even cleaner and greener.”
Boeing is investing in electric lift and has developed Wisk – a small eVTOL aircraft, which it sees as a key part of its strategy sustainability, but also which it is using to develop autonomous flight. Raymond says that “first and foremost” the company’s sustainable strategy is about, “investing in fuel-efficient airplanes, new airplanes replacing older, less fuel efficient airplanes”. Raymond points out that the industry will see “tremendous benefits on carbon emissions when the fleet renewal occurs by what’s in development today”, in addition to improvements in operational efficiency. He adds though that Boeing has been a big proponent of sustainable aviation fuel. “We’ve been involved in it since 2006. The first SAFpowered flight with Virgin Atlantic took place in 2008 on a Boeing aircraft. But there is scepticism on how fast SAF can scale up. It’s a hard problem… when you see what’s happening in the automotive industry to electrify, these big trends, I believe, give us optimism that this industry is going to solve this problem and find a way to have a lot of sustainable aviation fuel.”
Embraer and ATR are also working on their own visionary, greener aircraft concepts, which with their smaller size arguably have an easier starting point. In July 2022, ATR unveiled its plans for the next generation of its family of regional aircraft by 2030, the ATR EVO.
The plan foresees advanced design features and a new powerplant with hybrid capability to offer customers the next generation of ATR aircraft. Incorporating a new eco-design that includes new propellers and enhanced cabin and systems, it will remain a two-engine turboprop that can be powered by 100% Sustainable Aviation Fuel (SAF).
“Our next generation of aircraft will be a step forward in responsible flying through further incremental innovation,” said ATR CEO Stefano Bortoli. “When it enters the market, the new ATR ‘EVO’ will pave the way towards a decarbonised future for aviation. Key benefits include a 20% overall fuel improvement and 100% SAF compatibility. This means that the aircraft will emit over 50% less CO2 than a regional jet when powered by kerosene. When using 100% SAF, its emissions will be close to zero.”
Fabrice Vautier, ATR SVP Commercial, claims that the ATR EVO will be even more economical, with double digit operating cost savings achieved through 20% lower fuel burn and 20% overall maintenance cost reduction. “This means airlines can serve thin routes more profitably, and communities can benefit from more connectivity, more essential services, and more economic development. Our aim is to continue to offer customers and society ever more inclusive and responsible air transportation,” he said.
Stéphane Viala, ATR SVP Engineering, confirmed that the company has issued a Request for Information to the main engine manufacturers for the development of the new powerplant that will combine existing and future generation engine technology. “The ATR EVO will feature improved performance in terms of time to climb and an enhanced cabin, with increased use of lighter bio-sourced materials. Recyclability will also be at the heart of our new design.”
In the coming months, ATR plans to work with airlines, engine manufacturers and systems providers, with the aim to launch the programme by 2023.
In December 2022, Embraer unveiled two new concept aircraft as part of The Energia Family.
A year on from Embraer’s Sustainability in Action in event, which detailed the study of four new aircraft concepts powered by new technologies and renewable energies, the company has been focusing on two 19-30 seater designs for hybrid electric and hydrogen electric propulsion.
The Energia Hybrid (E19-HE and E30-HE) – originally revealed as a nine seater in 2021 – Embraer is now exploring a 19 and a 30-seater variant, which will feature: parallel hybridelectric propulsion, rear-mounted engines, and promises up to 90% CO2 emissions reduction when using SAF. The aircraft is forecast to be ready to launch to market in 2030.
The Energia H2 Fuel Cell (E19-H2FC and E30-H2FC) – revealed as a 19 seater in 2021 – is now being explored as a 30-seater variant, featuring hydrogen electric propulsion, rearmounted electric engines and zero CO2 emissions. Technology readiness is forecast for 2035.
While still at the evaluation phase, Embraer says that the architectures and technologies are being assessed for technical and commercial viability. The Energia Advisory Group has also been launched to harness inputs and collaboration from partner airlines.
Arjan Meijer, President and CEO, Embraer Commercial Aviation, said, “I believe we have set bold but realistic goals for these concepts to come to market. Since we announced our Energia concepts last year, we have been busy evaluating different architectures and propulsion systems. These efforts have resulted in the updates of our concepts that we are sharing with you today. Several airlines are part of our Energia Advisory Group, the experience and knowledge they bring to the study will be key to accelerate to the next phases.”
“As new propulsion technologies will be first applied on smaller aircraft, Embraer is in a unique position. The 19 and 30 seaters are sensible starting points for focused studies since they are likely to present earlier technical and economical readiness,” said Luis Carlos Affonso, Sr. VP of Engineering, Technology and Corporate Strategy, Embraer. “While the challenges of netzero are significant, in less than 25 years our commercial aircraft have already reduced fuel burn and CO2 emissions by almost 50% on a seat/mile basis, using only conventional fuels and propulsion – I’m convinced net-zero is a goal we can reach”.
Every loan, every facility that we have with clients has a colour level from dark brown to dark green with all the shades in between.
The growing importance of ESG and sustainability efforts for banks and financiers has partially prompted this move towards embedding a more formal ESG programme for all companies.
“Every loan, every facility that we have with clients has a colour level from dark brown to dark green with all the shades in between, says Natixis Jean Chedeville. “Aviation today sits in the middle since our business model is mostly focused on new generation aircraft.” The bank is focused structures with airlines that have committed to transition to net zero journey. Today, Chedeville notes that ESG issues ae not yet impacting borrows directly but adds that in the future there will be some restrictions for companies that haven’t started that journey or for certain assets. “At some point as an institution, we will want to ensure we have a greener colour mix in our portfolio and at the moment we have a mix of colour on our books.”
It has long been suggested that aviation finance industry need to create a similar framework to the Poseidon Principles, which integrate climate considerations into lending for maritime shipping. Six global aviation banks — Bank of America, BNP Paribas, Citi, Crédit Agricole CIB, Société Générale and Standard Chartered — have taken the lead on this, forming a partnership with RMI’s Center for Climate-Aligned Finance to help decarbonise the aviation sector through the formation of the Aviation Climate-Aligned Finance Working Group.
“Our work across shipping, steel and now aviation shows that collaboration is key to meeting climate commitments and to decarbonising the hard-to-abate sectors,” said James Mitchell, director at the Center for Climate-Aligned Finance. “We commend the Working Group banks for taking this important step toward creating a global platform for accelerating the decarbonisation of the aviation sector. The hard work begins now.”
The Working Group aspires to create a collective climate-aligned finance (CAF) framework that defines common goals for action for aviation sector decarbonisation. The aviation CAF framework will be based on the experience gained from the Poseidon Principles, which were launched in 2019 with 11 banking signatories. Today, Poseidon counts 29 signatories covering more than 50% of global ship finance. The aviation CAF framework is intended to be designed for similar rapid adoption by aviation financiers globally.
The CAF framework is a commitment by participating financial institutions to annually assess and disclose, consistent with the UN-convened Net- Zero Banking Alliance, the degree to which the greenhouse gas emissions from the aircraft, airlines, and lessors that they finance are in line with 1.5°C climate targets.
The Working Group is creating an industry-supported CAF framework, which will create consistency and transparency in reporting, establishing a level playing field for measuring progress against climate targets. With the CAF framework, financial institutions will be able to assess the emissions of their aviation loan books and work with their clients to report their emissions, fund lower-carbon solutions and support investments in new technologies.
At the Airline Economics Growth Frontiers Middle East & Africa conference held in Dubai in October 2022, Jose Abramovici, global head of asset finance at Credit Agricole CIB, provided an update on the progress made by the Aviation Climate-Aligned Finance Working Group to create a collective CAF framework. The Working Group is working on forging the measurement methodologies, emissions benchmarks, data pathways and governance structure of the CAF framework in collaboration with existing decarbonisation initiatives. Abramovici has been working on the aviation roadmap with Citi’s Munawar Noorani. Currently, there is only one roadmap covering all institutions. Even though the roadmap needs to be considered to credible and recognised by many global NGOs, an aviation roadmap also needs to be endorsed and adopted by the aviation industry. Abramovici explained that to develop a credible aviation roadmap, the industry needs transparency, granularity, and the ability to monitor progress and emissions as well as facilitate annual reporting. At the base level, there is quantity of carbon to spend between today and 2050, and the debate between aviation bankers is whether this quantity of carbon will be spent on a linear basis along a straight line, or whether a softer ramp up that would accelerate over time taking into account that fact that new technology is only promised to come online after 2035, and maybe even not until 2040. Air cargo also needs to be integrated into the matrix, added Abramovici, who noted that these conversations are ongoing and the team expects to have a better vision on the final aviation roadmap early in 2023.
While the challenges of net zero are significant, in less than 25 years our commercial aircraft have already reduced fuel burn and CO2 emissions by almost 50% on a seat/ mile basis, using only conventional fuels and propulsion – I’m convinced net-zero is a goal we can reach.
Sustainability-linked financing is being taken up by more airlines and alongside different aviation products. On such example from July 2022, is Cathay Pacific Airways’ first sustainability linked JOLCO in Asia-Pacific to fund one A321neo. The terms of the financing are linked to Cathay Pacific achieving certain targets in respect of predefined sustainability-linked indicators. In this transaction, performance targets focus on the proportion of new generation aircraft in Cathay Pacific’s group fleet and the gradual increase of SAF use in the carrier’s fuel consumption. Crédit Agricole CIB acted as global arranger and sustainability structurer, facility agent and security trustee and as a lender.
IAG-owned airlines, British Airways and Iberia, have both also closed sustainability-linked EETCs transitions this year in the private placement market.
ESG issues have become a central focus for investors, regulators and consumers, which will require aviation industry participants to adapt to new regulators and expectations.
The Net Zero Banking Alliance (NZBA) has brought together the world’s largest banks to focus on delivering the banking sector’s ambition to align its climate commitments with the Paris Agreement goals with collaboration, rigour, and transparency. The alliance is working on setting its 2030 targets for hard-to-abate sectors such as oil and gas, power generation and transportation, including aviation. The intention is to set targets with these industries with a view to engaging with the sector and clients’ transition plans rather than withdraw from financing those industries. Once those targets are set, the NBZA intends to disclose progress against a boardlevel transitional strategy that sets out proposed action and climate-related sectoral policies.
Speaking as the first local bank in the Middle East to sign up to net zero at COP 26, Sarah Pirzada Usmani from First Abu Dhabi Bank confirmed that it was critical for the sector to review its Scope 3 emissions and to ensure they are working with key clients in those hard-toabate industries to help them transition to net zero without restricting access to financing.
Scope-3 emissions are all indirect emissions that occur in the value chain of a reporting company. For an airline, they would include the emissions involved in manufacturing the plane and in preparing the food that people eat in flight, for example. For aircraft leasing companies, Scope 3 emissions would relate to how their airline customers use their aircraft, which is difficult. However, some lessors are taking a more proactive approach here and are working on building in sustainability-linked clauses in their lease contracts. Some lessors are also encouraging their clients to invest in sustainable aviation fuel (SAF) production.
Aviation banks are seeking to meet their own net zero targets by restricting financing to new technology aircraft, which have the most efficient fuel burn statistics, with many engaging with their airline clients specifically regarding their strategy to pivot to the use of SAF and where the banks can help in supporting the ramp up in SAF infrastructure and production.
For the aviation industry to have any chance of meeting its net zero targets, SAF production will need to be increased substantially. The investment needed will be way beyond even such a larger alliance of global banks and will depend on the backing from governments. Embraer’s Matheus Piorino explained Brazil’s existing commitment to the production of biofuels as well as Embraer’s investment into the development of the production and increased output of cleaner fuel. Embraer has already successfully tested its E2 aircraft using 100% ethanol, which has now been certified, and the manufacturer is continuing with testing for the development of a hybrid electric and hydrogen propulsion engine. These initiatives form part of Embraer’s ESG Flight Plan with sustainability goals, moving from carbon neutrality this year, to carbon neutrality in all operations by 2040 and supporting the industry toward net zero targets for 2050. This plan includes projects such as ensuring the company’s production and supply chain is 100% powered by renewable source electricity. Piorino has expressed doubts that financiers are yet interested in funding new technology projects and are more likely to become involved later down the development timeline. Although Usmani disagreed noting that banks needed to be at the forefront in funding new technology in the journey toward net zero.
Today, banks can and intend to finance SAF production and infrastructure development, as well as invest in future technology and fuels such as green hydrogen.
Meanwhile, also in 2022, Ryanair partnered with Citi to become the first European airline to deposit funds in its new Sustainable Deposit Solution. This new solution will enable Ryanair to invest excess cash to support different sustainable financing projects across Citi’s portfolio, such as renewable energy, water conservation, healthcare and education in emerging markets.
The initiative supports Ryanair’s sustainability agenda. Funds invested are allocated to finance or refinance assets in a portfolio of eligible green and/ or social finance projects, based on the criteria set out in the Citi Green Bond Framework, Social Finance Framework and Social Bond for Affordable Housing Framework.
Ryanair’s Director of Sustainability, Thomas Fowler, said: “Ryanair is proud to be leading sustainable aviation in Europe, which is further evidenced by our partnership with Citi to deposit funds in their new Sustainable Deposit Solution. This will not only help us manage our finances more sustainably but will further drive our sustainability agenda in whole as we support several sustainability projects across Citi’s portfolio, from water conservation to affordable housing and beyond.”
Citi has committed to financing and facilitating $1 trillion in sustainable finance by 2030 as part of goal to further the acceleration to a sustainable, low carbon economy. David Tsui, Global Sustainability (ESG) Head of Deposit and Investment Products at Citi, said: “Citi is helping our clients to progress their own ESG priorities by providing the opportunity to support eligible environmental and social projects in Citi’s portfolios.”
This announcement is only the latest in a long series of initiatives from Citi, which is committed to pushing the sustainability agenda forward in the aviation industry.
“Besides engaging with the Climate- Aligned Finance Center in creating a framework for banks to report our decarbonisation efforts under NZBA commitments, Citi is also working on products that would help our clients achieve their sustainability goals. We are very happy that Ryanair is the first European airline to have participated in our Sustainable Deposit Solution,” added Munawar Z. Noorani. Citi’s Global Co- Head of Aviation in a conversation with Airline Economics.
ESG issues have remained at the forefront of the global economic and corporate stage throughout the pandemic and into the recovery period. Specifically environmental issues and the move to decarbonise the aviation is a constant and foremost challenge for the entire industry, which is proceeding to work together to meet the commitments made to net zero in 2050.