As the world aims for carbon neutrality by 2050, aviation faces very distinct challenges. As Rory Conway, Associate Director explains, science and technology will be central to delivering on climate targets, but any aviation business that doesn't commit to environmental goals may find themselves left behind.
When Micheál Martin, Ireland's Taoiseach, addressed the Airline Economics Growth Frontiers virtual conference in Dublin in January this year, he chose a theme that would resonate across the three-day event – environmental responsibility, and the turbulent times ahead in aviation's journey to net-zero.
“The aviation sector, like all industries, must evolve,” he said. And considering that the global aviation industry produces around 2.1% of all human-induced carbon dioxide (CO2) emissions, the urgency of that evolution is clear.
It is something that aviation has already taken steps towards addressing. In October last year, International Air Transport Association (IATA) member airlines revealed an ambitious commitment – Fly Net Zero, a pledge to achieve net-zero carbon emissions from their operations by 2050.
Subsequently, at COP26 in Glasgow last November, the International Aviation Climate Ambition Coalition, in its inaugural meeting, laid out the broader industry's commitment to reduce its emissions as part of the world's wider drive towards carbon neutrality. Ireland, which accounts for over 60% of the global leased aircraft market, is one of 25 members of the Coalition.
Sector-wide commitments, however, are just one part of the picture. Questions still remain on how climate goals will actually be achieved and whether aviation businesses that fail to implement appropriate ESG targets may well lose investor support.
The role of science and technology
If aviation is to achieve its ambitious targets, then it will likely rely heavily on advances in science and technology. Indeed, recent improvements in aircraft design, aerodynamics and materials – as well as operating efficiencies – have already helped reduce the industry's environmental impact.
With other ground-breaking technology in the pipeline, the sector's net-zero carbon targets do look achievable. That was certainly the tone of the Dublin conference, where conversation was dominated by one emerging tech – sustainable aviation fuel (SAF).
Produced from non-fossil fuel sources, such as sustainable feedstock, SAF is chemically similar to traditional fossil jet fuel. Any aircraft certified to use the current specification of jet fuel can use SAF – either together with existing fuel or in its place.
IATA estimates that aviation is on course to account for 1.8 gigaton of CO2-equivalent emissions by 2050. SAF may reduce that by almost 60%. Hence its adoption will be a key driver of decarbonisation over the next decade.
Other clean innovations are following in SAF's slipstream. Electric propulsion engines will be powering small aircraft on short-haul flight routes by the latter half of this decade, with electric-powered regional aircraft of 50-100 seats expected from 2035. The larger aircraft we're used to today are still a long way from becoming a reality, however.
Hydrogen propulsion, meanwhile, offers the tantalising – albeit more distant – potential for near-zero greenhouse gas emissions.
Will no ESG policy equal no investment?
Sustainable aviation involves far more than this enticing new technology. Behind the scenes, market players are also coming to terms with stakeholders' evolving needs.
Society's attitudes toward the environment have changed dramatically in the past 20 years – as it's become increasingly clear that a lack of action will lead to catastrophe for future generations. Hence, finance is increasingly being seen through a green lens. Investors are looking for evidence of sustainable practices and talk of sustainability that translates to definite action.
Governments' ESG regulations are changing too. Take the EU Taxonomy framework. Adopted in 2020, it is a classification system designed to help improve the flow of money towards sustainable activities across the EU – providing investors and policymakers with black-and-white guidance as to what constitutes genuinely sustainable practice.
This offers security to investors keen to be involved only in opportunities that are good for the environment. It also reduces the risk of ‘greenwashing' – something even the most well-meaning organisation may fall foul of.
While still in its infancy, the EU Taxonomy framework is set to become a game-changer for the aviation industry and will have a significant impact on how its companies report ESG data, potentially as soon as the next two to three years. Entities will be expected to balance financial returns with other, equally pressing, environmental priorities. And failure to accurately report sustainability credentials will increase the risk of exclusion from future transactions.
At Ocorian, we've witnessed this sustainability equation become of increasing concern to clients. And given the focus of high-profile industry events like the recent aviation conference and COP26, this is set to intensify in the coming years.
The latest developments only add impetus for all stakeholders in the sector to stay abreast of change – and to act. The primary importance is to have a clear and comprehensive ESG policy in place to meet the EU Taxonomy measures being introduced from 2022 – both to contribute to society's ambitious climate goals, and to retain a role of any significance in the aviation sector.
The road ahead
The 2050 net-zero carbon target is clearly ambitious and won't be met without huge effort. But while there's no silver bullet solution, it is achievable. The tone at the Airline Economics Growth Frontiers conference was genuinely optimistic. And the development and adoption of innovative technology is being accelerated.
While the onus is on SAF as the main driver to reduce emissions in the near-to-medium term, the impact of electric and hydrogen propulsion is expected to kick in beyond 2040, creating a diverse and captivating technological picture.
But the flight towards carbon neutrality won't be powered solely by technology. Achieving net-zero will also require effort from all stakeholders, and that means great change for the aviation sector.
ESG is now a key focus for everyone from governments to consumers and investors. Any players in aviation that fail to take action may soon find themselves grounded.
At Ocorian, we understand there will be far greater emphasis on sustainability in future investment considerations. We're here to support you and your funding structures through these changes, or with any other queries you may have. Contact us below to cat to one of our aviation finance team.
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