Will Greener Financing Options Take Off In The Aviation Sector?
Aviation, according to the Committee on Climate Change is likely to be the largest emitting sector of greenhouse gases in the UK by 2050. In response to customer and regulatory (both governmental and intergovernmental) pressure, most airport authorities and airlines (AAAs) are striving to lower the impact of their operations on the global climate. The principal international regulatory means for achieving reductions in emissions is the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA) which was introduced by the International Civil Aviation Organisation (ICAO) in 2016. CORSIA is a global carbon offsetting scheme whereby airlines and other aircraft operators are to offset any growth in CO2 emissions above 2020 levels to achieve the ICAO goal of carbon neutral growth from this year onwards. The implementation of CORSIA is significant as it is signals a move in the international aviation sector (IAS) to a more global approach to emissions from regional approaches and in so doing may signal to lenders that the IAS is increasingly eligible for "green financing". Indeed, in 2018, the ICAO recognised that more adequate financial packages should be made available to ease the financial burden and risks associated with deviating from conventional IAS practices. This blog discusses some of these financial packages.
Green Purpose Loans
These types of loan are made available exclusively to finance or to re-finance new or existing green projects. A loan utilised to acquire an aircraft may prove somewhat problematic in this regard but a loan utilised to finance the retrofitting of airport infrastructure to improve energy efficiency would not. For example, funds could be ring-fenced to finance the installation of on-site renewable energy generation projects to transition away from fossil-fuel consumption for the provision of heating, cooling and transportation at airports. Alternatively, facilities could be utilised to replace fossil-fuel powered ground support equipment at terminals, such as replacing baggage tugs with electric vehicles or installing gate electrification equipment that power and cool aircrafts prior to departure.
These loans are linked to sustainability performance targets for a borrower such that if the relevant targets are met, the rate of interest on the loan will correspondingly decrease (Interest-Ratchet); an attractive option to operators. Sustainability loans may be more suitable than green loans to operators, where the use of proceeds are not to be allocated exclusively to green projects. The implementation of CORSIA could see sustainability loans provided where cash injection is required for operators as part of a re-fleeting of a borrower business to more fuel efficient aircraft, investing in biofuel technologies or more efficient aircraft engines to reduce their emissions or towards diversifying their business activities or for R&D purposes. The recent Sydney Airport financing and the BNP Paribas' financing of JetBlue Airways were both reported as being general corporate revolving credit facilities with an Interest Ratchet. In the JetBlue financing, the loan package was linked to the airline meeting its sustainability goals, such as being carbon neutral in its fuel consumption by the end of 2020.
Public Financing – Green strings
In light of the catastrophic economic fallout to the aviation industry caused by COVID-19, airlines are seeking £22.7bn in state aid. In many cases the provision of a "bail out" to airlines has by necessity been immediate and other priorities have overtaken the environment which has led to a lack of imposition of "green strings" by governments to its funding terms. Some view this as a missed opportunity. However, this is not to say there may be no change in tack taken by government in the future; states may take greater stewardship roles with their lending and embrace incentive-based schemes to further the goals of the ICAO. For example, facilities may be ring-fenced to meet key decarbonisation goals, such as replacing older carbon-intensive aircrafts or investing in other environmentally friendly practices to off-set carbon intensive operations.
Post Covid-19 – looking ahead.
We see that there is potential for lenders to take steps (and some notably have already done so) into the realm of green finance within the IAS. The emergence of a space for this within the sector is fairly recent as historically there was the belief that, due to the very nature of the aviation industry and its contribution to carbon emissions, actors in the aviation sector would be ineligible for these financings. Recent deals and proposals for certain initiatives where loans can be utilised beyond the "use of proceeds" criteria has changed this.
The aviation industry is under increasing pressure (as are lenders) to show that they are taking seriously the environmental impact of their businesses. The impact that COVID-19 has had on the industry will arguably only serve to further the demands on airlines to have more fuel-efficient aircraft and to seek appropriate financings to achieve this. Whether this will translate to a higher take up of green financing, however, remains to be seen.
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