Automakers Outstrip Airlines in Decarbonisation Race

Airline transition plans yet to take off due to overreliance on carbon offsets and limited sustainable aviation fuel progress, says Moody’s.

Automakers are in a stronger position to transition to a net-zero greenhouse gas (GHG) emissions economy compared to airlines, according to Moody’s Investors Service. The credit ratings supplier has updated its carbon transition assessment (CTA) scores for global automakers and the passenger airlines sector for the first time since 2019.

While automakers are embracing electricity-powered vehicles and moving away from fossil fuels, the aviation sector still hasn’t tested sustainable aviation fuel at scale, therefore limiting its progress to net-zero, the reports revealed.

Corporates in these sectors are assessed across four areas: their current business profile; policy, market and technology risk; medium-term management response; and long-term resilience. They are then assigned a score on Moody’s 10-point scale, with CT-10 being assigned to corporates that have no plans in place to manage the carbon transition.

The 19 assessed global automakers achieved a median score of CT-5 (‘strongly positioned’), whereas the 21 airlines have a median score of CT-7 (‘moderately positioned’).

Gear change

Automakers have responded to demands from investors to shift towards the electrification of the sector, increasing their production of alternatively fuelled vehicles (AFVs) or more fuel-efficient vehicles, according to Moody’s in-depth sector report.

Tesla remains the only automaker to receive a CT-1 score, meaning it’s the most advanced in its decarbonisation efforts. However, 13 of the other companies assessed scored between CT-3 to CT-5, meaning that they are also in a strong transitional position.

“The median score uptick was driven by higher forecasts for alternative fuel production and improved prospects for complying with emissions regulations,” said James Leaton, Senior Vice President at Moody’s.

Renault showed the most improvement, with its planned expansion in AFV production driving its three-notch jump to CT-3, the report noted.

However, due to the limited availability and high pricing of quality battery cells and bottlenecks in infrastructures for AFV charging points, developments in this space still call for further investment in green infrastructure and battery production.

Furthermore, the automotive industry will require an increasing amount of electricity to support its transition away from carbon-intensive operations and products, which, by extension, will increase pressure on the utilities sector.

Moody’s anticipates that the auto industry’s shift to AFVs will only accelerate over the next decade, particularly as the European Union’s recent proposals for new Euro 7 emissions legislation could see internal combustion engines (ICE) phased out of production by 2026.

The Transition Pathway Initiative (TPI) – a global, asset owner-led initiative with US$26 trillion in AUM and advice – has also assessed the automotive industry’s decarbonisation efforts, measuring the ‘tank-to-wheels‘ emissions of the sector.

Airlines remain grounded

While some airlines have made some progress, the overall decarbonisation of the aviation sector is hindered by a lack of technological innovation and limited progress in the exploration of sustainable alternatives to fuel, according to Moody’s CTA assessment.

Airlines are relying on buying eligible carbon offsets to manage their emissions, which simply isn’t a viable solution in the long term, the report noted. Until production capacity of sustainable aviation fuels is tested at scale and “lower carbon-emitting alternative propulsion technologies become viable”, airlines are going to be left behind in the race to net-zero.

According to the TPI’s 2021 State of Transition report, aviation continues to be the least forward-looking sector, with 91% of airline companies failing to align with Paris targets by 2050.

Investors are increasingly taking more drastic action to prompt airlines to look to the future and commit to net-zero targets. For example, as part of its Climate Impact Pledge, UK asset manager Legal and General Investment Management (US$1.7 trillion AUM) imposed a voting sanction during the 2021 proxy season on Air China as the corporate didn’t respond to engagement efforts over its lack of an operational emissions reduction target.

Not all airlines are on board with net zero. Earlier this month, independent think tank InfluenceMap outlined how the aviation sector is actively trying to avoid effective regulation in this area, both by lobbying against EU-level policies and weakening the international carbon offsetting scheme, CORSIA.

However, in February, Airlines for Europe, the European Regions Airline Association, Airports Council International Europe, Aerospace and Defence Industries Association of Europe, and the Civil Air Navigation Services Organisation launched the ‘Destination 2050’ plan. Covering all flights within and departing from Europe, the plan aims to achieve net-zero by 2050 through a combination of technological innovation, streamlined operations and sustainable aviation fuels.

“We expect aviation to be subject to increasing pressure from governments and shareholders to reduce emissions in order to deliver on net-zero targets,” said Ram Sri-Saravanpavaan, AVP Analyst at Moody’s.

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