The airline industry and ESG: What investors need to know

GHG emissions from air travel

According to the Air Transport Action Group, air travel accounts for around two percent of all carbon emissions and 12 percent of all transportation-related emissions.

In regions with mature aviation markets, such as the US and EU, air travel emissions are closer to four percent of overall emissions. According to one study, only one percent of the world’s population — the most frequent business fliers — account for 50 percent of all aviation emissions.

These and similar statistics have led to an increasing push from investors for the aviation industry to weigh ESG considerations more heavily.

Current attempts at goals and standards

Late in 2021, in advance of the COP26 UN climate change conference, leading airlines, airports, and manufacturers of aircraft and engines committed to net-zero emissions by 2050. In addition, five different European airline associations have come together for Destination 2050, aiming at net-zero emissions for all flights within and departing from the EU, UK and European Free Trade Area by 2050.

By contrast, the UK’s Flightpath to the Future plan for helping its aviation industry recover from the effects of the pandemic does not include a sustainability plan. However, a UK “jet zero” plan to reach the 2050 goals is expected this year.

There is no single initiative for the aviation industry as a whole. As the UK’s planning priorities show, the economic health of the industry will inevitably take precedence over emissions reduction, unless a larger-scale framework is developed and enforced.

Possible solutions to aviation’s emissions problems

Modifications to air traffic management and aircraft operations have resulted in fairly quick emissions reductions, but there is a limit to these improvements.

More efficient aircraft will reduce emissions on a per-passenger-mile basis, but increasing demand for flights as the world recovers from the pandemic will increase both passengers and mileage, thereby eliminating emissions reductions.

Beyond more efficient aircraft is the promise of technologies such as electric and hydrogen-powered aircraft, as well as synthetic jet fuel. For the foreseeable future, however, electric power will be feasible only for short-haul flights, distances one could argue are better handled by trains and other ground transportation.

Sustainable aviation fuels (SAFs) are made from used cooking oil and processing waste. While they show promise, increasing production of such biofuels can in some cases cause environmental damage, while reducing emissions by at most 50 percent.

New technologies such as hydrogen power require significant investment, with long time horizons and no guarantee of return. Those time horizons are likely to be particularly long without significant government support, which no jurisdiction is now extending.

In response to these challenges, some airlines and travel groups have created new venture capital units, including United Airlines Ventures and JetBlue Technology Ventures. These units focus on investments in airline sustainability startups to jump-start development in promising areas that will not show profits quickly.

It should be added that offsets are often used to achieve carbon goals, but their actual benefits are small or nonexistent. A 2017 study by the European Commission found that 85 percent of EU offset projects failed to reduce emissions.

Considerations for investors

Green bonds have long carried a premium for investors, but this so-called “greenium” is declining in value, as investors have more experience with the asset class and are demanding better overall performance.

There are currently no agreed-on standards for measuring aircraft emissions or establishing who should get what credit for reducing them, and there does not seem to be any industry-wide effort to establish such standards. As a result, investors face significant difficulties when comparing ESG investments across their aviation portfolios.

Last year, the Science Based Targets initiative (SBTi) announced that only 20 percent of G20 companies have climate targets that are science-based (i.e. that are in line with what current climate science indicates will limit global warming to below 2 degrees Celsius). SBTi provides Science-Based Target Aviation Guidance to support the aviation industry in creating such targets.

The pressure to announce and commit to ambitious emissions goals has so far almost always run into the hard realities of slow technological progress, revenue goals and narrow profit margins, forcing companies to reveal that they can’t reach their goals. In some cases, they may try to make it seem as if they are making progress — in other words, they may “greenwash” their efforts.

According to the climate charity Possible, based on research by Green Gumption, the airline industry has achieved only one in 50 climate targets it has announced since 2000. Activists interpret this as deliberate foot dragging, while others point to significant technological and business challenges.

Several airlines have been accused of advertising that leads passengers to believe their GHG impact is less than it is. Recently, environmental groups sued an EU-based airline over what they say are such misleading claims.

All of the possible new propulsion methods will be more expensive than current kerosene-fueled engines, some by a factor of two or three, and higher prices for consumers will inevitably follow.

Furthermore, many companies that use airlines have committed to reducing their own emissions as a business interest. Some have specifically committed to reduce their flying-related business travel, and many of those are also signing up to net-zero emissions by 2050. This, combined with rising fuel prices, may lead to a reduction in air-travel demand, although current demand is robust.

The problem of reducing airline industry GHG emissions is challenging, and there are no obvious answers. To take a major step towards meaningful change, the industry must set common reporting standards so investors can determine which interventions show the greatest benefits and put their money where it can be most effective.