What investors need to understand about the aviation sector and ESG
Investor interest in environmental, social, and governance issues has increased. Carbon emissions from air travel have also become a matter of particular concern because the airline industry is a substantial source of greenhouse gases (GHGs). Investors are increasingly expecting better data as well as greater proof that airlines and other stakeholders are actually reducing GHG emissions.
GHG emissions associated with flying
The Air Transport Action Group estimates that 12% of all emissions connected to transportation and 2% of all carbon emissions are attributable to air travel.
The percentage of emissions from air travel in developed aviation markets, including the US and EU, is closer to 4%. One study claims that only 1% of the world’s population, or the most frequent business travellers, are responsible for 50% of all aviation emissions.
Investors are pushing harder for the aviation sector to give ESG factors greater weight as a result of these and comparable figures.
Attempts at standards and goals right now
Leading airports, airlines, and engine and aircraft manufacturers made commitments to achieve net-zero emissions by 2050 late in 2021, ahead of the COP26 UN climate change summit. The goal of Destination 2050, a collaboration between five distinct European airline groups, is to achieve net-zero emissions for all flights entering and leaving the EU, the UK, and the European Free Trade Area by the year 2050.
To help its aviation industry recover from the pandemic’s consequences, the UK’s Flightpath to the Future plan does not include a sustainability strategy. To achieve the 2050 goals, the UK is likely to release a “jet zero” plan this year.
The aviation sector as a whole lacks a single initiative. As evidenced by the UK’s planning goals, unless a more comprehensive structure is created and implemented, the industry’s financial stability will invariably take precedence over emissions reduction.
Potential remedies for the pollution issues in aviation
There is a limit to these advancements, but modifications to air traffic control and aircraft operations have quickly reduced emissions.
On a per-passenger-mile basis, more energy-efficient aircraft would lower emissions, but rising demand for travel as the world recovers from the epidemic will increase both passengers and miles, negating emissions reductions.
The potential of technologies like electric and hydrogen-powered aircraft, as well as synthetic jet fuel, goes beyond more efficient planes. But in the near future, electric power will only be practical for short-haul flights, which some could argue are better served by trains and other forms of ground transportation.
SAFs (sustainable aviation fuels) are produced from processing waste and leftover cooking oil. Although they have potential, expanding the production of these biofuels may occasionally have a negative impact on the environment while only partially lowering emissions.
With long time horizons, huge investment, and no assurance of return, new technologies like hydrogen power demand these characteristics. Without major government support, which no jurisdiction is now expanding, those time horizons are likely to be especially long.
Some airlines and travel organisations, such as United Airlines Ventures and JetBlue Technology Ventures, have established new venture capital sections in response to these difficulties. These entities concentrate on making investments in airline sustainability companies to spur growth in promising fields that won’t generate profits right away.
It should be noted that although offsets are frequently employed to meet carbon reduction targets, their actual advantages are minimal or nonexistent. According to a 2017 assessment by the European Commission, 85% of EU offset initiatives did not succeed in lowering emissions.
Investor considerations
Investors have long enjoyed a premium for green bonds; however, this so-called “greenium” is losing value as a result of investors’ growing familiarity with the asset class and their increasing demand for higher overall performance.
There are currently no accepted standards for calculating aircraft emissions or allocating responsibility for their reduction, and there doesn’t appear to be any industry-wide attempt to create such standards. As a result, it can be extremely challenging for investors to compare ESG investments across different airline portfolios.
Only 20% of G20 firms have science-based climate targets, according to SBTi’s announcement from the previous year (i.e. that are in line with what current climate science indicates will limit global warming to below 2 degrees Celsius). To aid the aviation sector in setting such goals, SBTi offers Science-Based Target Aviation Guidance.
Since the temptation to publish and commit to aggressive emissions goals has so frequently clashed with the harsh reality of sluggish technological advancement, sales targets, and tight profit margins, businesses have been forced to admit that they cannot meet their objectives. Sometimes they may try to “greenwash” their efforts in order to make it appear as though they are making progress.
Only one out of every 50 climate targets announced by the airline industry since 2000 has been met, according to the climate charity Possible, based on research by Green Gumption. While some activists view this as intentional foot dragging, others highlight serious technological and commercial difficulties.
Many airlines have been charged with using deceptive advertising to make passengers feel their GHG effect is smaller than it actually is. Environmental organisations have filed a lawsuit against a European airline for making what they think are false promises.
Consumer costs will definitely increase as a result of all potential new propulsion technologies being more expensive than current kerosene-fueled engines, some by a ratio of two or three.
In addition, a large number of businesses that utilise aircraft have made a commitment to lower their own emissions for commercial reasons. Some people have made a special commitment to cut back on business travel that involves flying, and many of them have also vowed to achieve net-zero emissions by 2050. The demand for air travel may decline as a result, despite the fact that it is currently strong due to this and rising fuel prices.
There are complicated solutions to the issue of lowering GHG emissions in the airline business. In order for investors to identify which activities demonstrate the most advantages and direct their funds where it will be most productive, the industry needs to establish uniform reporting standards.
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