Standardized Aviation Sustainability Metrics Key For Future Financing

LONDON—Financiers have warned that standardized sustainability reporting will be needed for airlines to secure funding in the future, prompting IATA to draft new guidance.

Environmental, social and governance (ESG) metrics are playing an increasing role for the finance community, meaning airlines are being hit by a raft of data requests, each slightly different from the next.

“We have an alphabet soup of initiatives,” IATA sustainable finance manager Emi Mima told delegates at the Aviation Carbon conference in London. This is causing confusion for international sectors, such as aviation.

The “alphabet soup” includes various disclosure requirements, imposed by regulators such as the EU and the U.S. Securities and Exchange Commission (SEC), as well as investor requests, queries from ESG ratings agencies, and airlines’ own voluntary reporting standards. There is also the Task Force on Climate-Related Financial Disclosures (TCFD), which is a voluntary framework for sustainability reporting in corporate filings.

Other regulatory frameworks are also under development, such as the EU Corporate Social Responsibility Directive (CSRD)—which is expected to be adopted in November—and the EU Taxonomy for Aviation. 

“All of this creates multiple layers of requirements for airlines,” Mima said. “This challenge is what IATA is looking to solve with our ESG metrics that we have been developing,” 

IATA has set up a sustainable finance task force to come up with metrics that are specific to the airline sector. This guidance will be developed by the end of 2022 and then made public.

This builds on IATA’s CO2 monitoring tool CO2 Connect, which aims to provide high-accuracy emission calculations for commercial-passenger flights. CO2 Connect is based on primary data from airlines, including actual fuel burn and load factors.

“Another challenge that we see is aviation being seen as a high-risk investment. We do not see this yet, but it is a possible risk,” Mima said, citing some examples of companies that have been faced with eco-litigation, such as Deutsche Bank and KLM. This could impact airlines’ access to capital and cost of capital.

James Collins, aviation finance partner at law firm Stephenson Harwood, said the absence of standards makes it “very, very difficult” for his financing colleagues to confidently back projects if they could be held accountable for getting involved.

“We’re seeing a huge increase in climate-related litigation. And the prevailing view, certainly in the London legal market, is that’s only set to increase,” Harwood said. “To coin a phrase, it’s very much a greenfield site. The threat for corporates, and in particular their directors, in decision-making is incredibly significant.”

Similarly, a non-profit association called “IMPACT on Sustainable Aviation” is aiming to improve transparency around airline sustainability KPIs. Ulrike Ziegler is president of IMPACT, which was formed in early 2022 by a group of aviation financiers. IMPACT now has 34 members, including universities.

“We’re really missing meaningful [ESG] metrics and standards when it comes to the financing of aircraft,” Ziegler said. “We’re talking the biggest problem of mankind and we don’t have common standards.”

IMPACT has been gathering data, but only 15% of airlines worldwide report on their ESG performance. “There’s literally no consistency,” she said. “If we don’t take action—if we don’t assume responsibility as one of the important stakeholders—we are scared that the regulators will take action and that could be severe, ultimately impacting aircraft values, meaning returns on financing investments will go down.”

Ziegler said these common metrics could be the total CO2 footprint of an airline, eco-efficiency (CO2 per RPK), and the “uncoupling metric,” which would measure the pace of traffic growth combined with carbon emissions growth.

“Decoupling is already a metric which is widely used on a state basis when you compare the development of the CO2 footprint versus GDP, so it’s not unknown. We just need to translate it into aviation finance,” Ziegler said.

Likewise, Natixis head of aviation investment banking for the Americas Yevgeniya Levitin said her company is already shifting away from “brown” industries in favor of more sustainable sectors. Airline investments already have to pass through a stringent filter, including 46 decision trees, and they usually come out as neutral to light brown. 

“Unfortunately, when it comes to aviation, this tool is a rather blunt instrument. This is why we’re working at pace to try to fine tune it to the nuances of aviation, such as not just the age of aircraft for example, but also the type of aircraft and the efficiency,” Levitin said. “Basically, we’re trying to make that decision process a bit more granular when it comes to aviation.”