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Commentary

ESG Can Put Airports on Course for Growth

Delays will hike costs and risks, but prompt action can drive efficiency, says Sam Folley, Partner at Trowers & Hamlins.  

Airports and the aviation industry are central to the growth of global economies, connecting markets, communities and people across the world. However, with circa 2.5% of global carbon emissions being produced, ESG must become a central tenet of the aviation industry if growth is to continue.

Stakeholders are alive to the climate concerns and without stakeholder buy-in, airport operators and airlines could lose their social licence and their ability to grow. Consumers’ consumption patterns and attitudes have changed over the last decade. Increased extreme weather events have brought climate change to the front of many consumers’ minds. With this and Covid-19, previously flights which seemed necessary are being questioned. To retain and grow their client base, airports and airlines need to ensure their current practice and development plans have ESG ingrained.

Fully thought-out plans

Green financing and sustainability-linked products in this sector are growing; Sydney Airport had use of a A$1.4 billion debt facility refinanced with margins linked to sustainability performance and British Airways raised £500 million with the first enhanced equipment trust certificate transaction linked to the airline’s sustainability targets. To take advantage of the availability of these products, airport operators and airlines need to have fully thought-out ESG plans.

Due to the scale of the change required, it is not enough to think about ESG in ten years’ time, long-term sustainable development plans and capital investment plans need to be thought of now.

It is clear from current regulation the aim globally is for carbon neutrality by 2050. While the Paris Agreement does not include the international aviation industry it is clear the intention is to reach net zero by 2050. The UK domestic strategy under Jet Zero is in line with this by looking to maintain carbon emission to 2019 levels and reducing emissions to 19.3 MtCO2e by 2050. The International Civil Aviation Organisation’s Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA) is another tool in which international law is looking to regulate the industry.

CORSIA not only requires all airline operators with annual emissions greater than 10,000 tonnes of CO2 to annually report their emissions but also seeks to limit or offset carbon emissions by international aviation to 2019 levels. With its market-based approach to offsetting, CORSIA will force aviation companies to either improve their efficiency, or pay not to, and while it is currently voluntary (with 115 states having volunteered) by 2027 this will become mandatory.

Future trajectory

While the current international regulation remains focused on targets, it is clear to see where the trajectory is going: restrictions. While long-term goals are being set, it is never long until we see the carrot of subsidies and benefits turn into the stick of restrictive regulation. If we look at the motor industry in the UK, there has been the slow movement from subsidies for hybrid vehicles through the Plug-in Car Grant, to only applying to fully electric vehicles and in March 2023 the subsidies will end. This is now followed by the ban on new fossil fuel powered cars being sold by 2030. Even in aviation we are already seeing restrictions such as the French ban on short haul domestic flights. With this trend in mind, airports and the aviation industry need to start transitioning while the carrot is still there.

With milestone flights such as the recent Emirates flight with its use of 100% sustainable aviation fuels (SAFs) for one of its engines, the development and up-scaling of aircrafts powered by alternative fuel sources take time and capital, where changes to airports themselves can be implemented now.

We are in an age where data, if used correctly, is king. By incorporating green clauses into the leases and concession agreements for their diverse range of users, airport operators can ensure their occupants contribute to sustainability but more importantly can obtain data on consumption, wastage and inefficiencies. This data on energy consumption and sustainability can be used to input into long-term business plans, airport development, operational activities and sustainability-linked financing.

Future-proofing

Minimum Energy Efficiency Standards are already seeking to transform property by designating inefficient properties as sub-standard, preventing them from being leased to rent paying occupiers. From April 2023 all UK non-domestic properties for rental must have a minimum EPC rating of E which is to increase to a minimum EPC rating of B by 2030. Due to these regulations, airports need to be future-proofing their portfolio now. There are incremental changes that can be made to current buildings such as LED Lighting, air source pump heating, insulation, and revitalising less efficient buildings now, before they become sub-standard.

Given the scale of land owned by airport operators, it is unsurprising we are seeing it be used more efficiently, such as solar farms being fitted in airports. Glasgow Airport is in the process of building a 30-acre solar farm (due for completion in the autumn). When fully operational this will supply all electricity needs for the airport and allow for excess energy to be sold to neighbouring businesses. With roof space, large car parks and public safety zones being largely unused there is untapped potential all over an airport. These solar farms can help reduce energy costs, provide electricity for Electric Vehicle fleets, power EV charging points for airport users (including future EV hire stock) and could allow for profit to be made selling unused energy.

Most airports and airlines want to grow. They must put ESG front and centre of their strategy to do so or they risk losing customers, investors and public support. Moreover, they are likely to come up against legally binding restrictions before long – embracing ESG now will help avoid being caught, or at the very least, will make future compliance less costly.

This article was co-authored by Daniel Frawley, Solicitor, Charlotte Earl, Associate, at Trowers & Hamlins.

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