Slow to decarbonise and resistant to proposed EU fuel tax levies, the aviation sector needs investment and engagement.
Once a luxury, air travel has become an everyday reality over recent decades, at least in developed markets. Billionaires are now looking beyond Earth, competing to monopolise the commercial space travel.
Rather than dreaming of new horizons, the aviation industry finds itself grounded, and fearing for its future. Hamstrung by the Covid-19 pandemic, long-term prospects are threatened by its carbon-intensive, hard-to-abate nature. In 2019, airlines took on 4.5 billion passengers, producing 915 million tonnes of CO2, according to the Air Transport Action Group (ATAG) coalition. And that’s before air freight is considered.
Overall, the global aviation industry is responsible for 2% of all human-induced carbon emissions and 12% of transport emissions, although the precise nature of its footprint is subject to debate.
Aviation has been slow to come to terms with the climate crisis. In fact, it’s the “worst performing of all high-emitting industries” said the Transition Pathway Initiative’s 2020 ‘State of the Transition’ report, noting that 91% of assessed airline companies failed to align with even the least ambitious climate targets.
“Our main concern is that the sector is lacking viable low-carbon technologies and has a history of lobbying against policy measures to reduce transport system emissions. There are also very serious questions around the feasibility of producing biofuel at the scale required,” says Yasmine Svan, Senior Sustainability Analyst for UK asset manager Legal and General Investment Management (LGIM).
As part of its ‘Fit for 55’ package, the European Commission plans an EU-wide fuel levy for flights within the 27-nation bloc, contributing to its overall target to reduce carbon emissions by 55% by 2030 compared to 1990 levels.
The proposal will mean jet fuel is taxed in line with other transport sectors, phased-in over the next decade to allow airlines to recover from the economic impact of the pandemic.
This makes harder the already complex task of transitioning to low-carbon fuel and engine alternatives, airlines have argued.
Nonetheless, investors want to see increased investment in sustainable aviation fuels (SAFs) and a reduction in carbon offsetting. SAFs are produced using waste products from feedstock, ranging from agricultural residue to carbon removed directly from the air.
With the International Air Transport Association (IATA) predicting a net loss of US$38.7 billion this year, thanks largely to ongoing travel restrictions, decarbonisation will need investor and policymaker support.
Europe braces for turbulence
A tax on fuel risks handicapping environmental progress, says Lauren Uppink, Head of Aviation, Travel and Tourism at the World Economic Forum (WEF).
“This just means that airlines will need to manage the increased costs of SAF production while paying tax. It’s like they’re being charged twice; there’s no tax incentives or credits,” she says.
The Commission also intends to reduce the EU’s Emissions Trading Scheme’s (ETS) ‘free’ carbon credit allowance for aviation, phasing out free permits by 2026 for airlines’ intra-European flights. Carbon credits are used by companies to offset or compensate for their current emissions levels at an organisational or product level. The ETS sets a cap on the number of annual credits companies can purchase, steadily reducing the amount over time to ensure they progressively reduce emissions.
Currently, Brussels gifts airlines most of the credits they need, limiting their exposure to the price of permits which has reached peaks of €58 per tonne of CO2 this year.
“ESG-related costs will rapidly increase for airlines, hurting their already thin margin base. While we expect the impact will be felt by global airlines in the long-term, European airlines will suffer more in the near-term compared to their competitors [due to the Commission’s proposals],” says Hugh Shim, Director of Corporate Ratings, EMEA, at Fitch Ratings.
A complementary proposal published by the Commission’s ReFuelEU Aviation initiative in July would require airlines to blend a 2% minimum of SAF into kerosene from 2025, increasing to a 5% minimum in 2030 and 63% in 2050. This will require both public and private investment.
According to WEF’s Clean Skies for Tomorrow (CST) coalition, SAF production levels can “achievably increase” to 10% of total EU jet fuel (currently below 1%) through blending SAF with existing fuels, provided airlines are afforded preferential feedstock access and a long-term policy framework to support further SAF development.
More progress could be made if the EU encouraged investment in SAF production, making it more affordable for airlines to switch to SAF alternatives, experts argue.
This increase in SAF production will require public financial investments of €120 billion over 15 years, the whitepaper noted.
While some remain sceptical that the aviation sector is transitioning fast enough to meet Paris-aligned targets, WEF’s Uppink says she is “encouraged” by the willingness shown by airlines, aircraft manufacturers and aerospace companies to go green.
For example, multinational aircraft manufacturer Boeing published its inaugural sustainability report, outlining areas of focus and development as it reduces its reliance on fossil fuels, joining Singapore Airlines, Emirates, British Airways and others. With the IATA providing guidance to corporates in the aviation sector looking to report in line with the Global Reporting Initiative (GRI), this suggests that sustainability reporting is going to become common practice.
This would allow investors clearer insight into corporate decarbonisation strategies and progress made on an annual basis.
“Because of the economic pressures felt by the pandemic, [WEF] was concerned that airlines would withdraw from environmental initiatives, but we’ve actually seen them double down on their sustainability and decarbonisation efforts. I think they really do realise that climate change is the next existential crisis,” Uppink tells ESG Investor.
This year, British Airways issued a sustainability-linked bond, which will finance activities contributing to the goal of transitioning to a low-carbon business model, such as the delivery of more fuel-efficient aircraft.
Furthermore, Rolls Royce, a British multinational aerospace and defence company, is an example of how the aviation industry is working to recover from the pandemic by investing in future technologies, says Mark Pillans, Managing Director of Industry at alva, a stakeholder intelligence provider. Rolls Royce has invested in products such as the Ultrafan turbine, which will boost fuel efficiency by up to 25% compared to earlier engines.
“Rolls Royce has also been involved in a variety of electrification programmes and is investigating hydrogen and fuel-cell options. Investment will be needed to develop and upscale these new technologies,” Pillans says.
Newer aircraft models – such as the Airbus A380, Boeing 787 and Embraer E2 – have been built with sustainability in mind, using an average three litres of jet fuel less per 100 passenger kilometres, according to ATAG.
Policymakers can smooth the path to net-zero, too. The Single European Sky Air Traffic Management (SESAR) initiative calls for more efficient use of air space management, which is currently organised broadly according to national geographic boundaries. This can lead to longer flightpaths and delays, resulting in more carbon emissions per flight.
Improving the efficiency of air space alone could reduce annual airline emissions by 6-10%, according to the IATA.
In it for the long haul
With some exceptions, investors are remaining engaged to ensure the aviation sector remains on the flightpath to net zero.
A sector-specific workstream has been launched by Climate Action 100+, designed to provide investor-led net zero guidance for the most carbon-intensive industries. Each guidance report produced will be co-developed by the investor networks supporting the CA100+ initiative, such as Ceres, the Institutional Investors Group on Climate Change (IIGCC) and the Principles for Responsible Investment (PRI). The latter published the first round of CA100+ guidance for the aviation sector in January.
Nonetheless, there are inevitably cases where investors will be forced to take more drastic action when corporates don’t respond to engagement efforts, either through voting or divestment.
As part of its Climate Action Pledge, LGIM imposed a 2021 voting sanction on Air China when the firm didn’t respond to engagement efforts over its lack of an operational emissions reduction target.
Despite the urgency of climate change, investors can’t lose sight of the social impact rapid decarbonisation could have.
Nearly 88 million jobs were supported by the aviation sector and related tourism before the pandemic, according to ATAG, with 11.3 million staff working directly with airlines. Penalising a sector in transition could shake the market, causing a loss of jobs or a decrease in people choosing to fly altogether, says Uppink.
“A just transition is essential,” she emphasises. “We’re seeing the most sustainable progress when we bring investors into the same room as aviation fuel suppliers, airlines and policymakers. Change has to happen across the value chain and it has to be worked on together.”