As airlines deploy their transition strategies towards a zero carbon future, the focus should be equally aligned to capture the business opportunities, manage the risks associated with climate change and work with ecosystem partners to ensure the benefits are achieved at scale.
Those were some of the key messages offered by aviation, insurance and climate change experts to virtual delegates at WTW’s recent webinar - Climate and ESG: Implications for the Airline Industry, facilitated by WTW’s Climate Resilience Hub lead Rowan Douglas, CBE.
Attendees at the fourth in the series of six recent aviation webinars were told that any climate change strategies need to be about more than simply counting emissions and managing the risks.
According to Dr Tony Rooke, Director of WTW’s Climate Resilience Hub, there are three key steps to building any airline’s zero carbon transition strategy: pointing your arrow of transition in the right direction; demonstrating the related performance (to financial markets and insurers, for example); and building the industry connections to achieve the transition in partnership.
“It is not just about risk … and it is not just about what you do; it is how you work with the industry and trade bodies, between sectors,” Dr Rooke told delegates. “Aviation can't do it on its own, it needs to work with the fuel and power sectors, [and] with policymakers. That is going to be critical. We can't have sectors going massively out of step without the whole of the economy coming with them.”
For airlines with a presence in the UK market, achieving the government’s net zero carbon target by 2050 is an enormous challenge, one that will require collective and co-ordinated engagement from every department and individual.
It would be understandable if the challenge seemed insurmountable to some chief risk officers; but they can take comfort in the fact that all airlines calling at UK airports will be facing the same challenge, giving them common purpose, motivation and resources. And then there are the rewards for getting your transition strategy right, ahead of the market.
According to Joe Tunstall, Senior Risk Manager and Head of Insurance at easyJet, the prospect of having to re-align your business to manage climate risks may unsettle some airlines, but it has not been a sudden shock in the way that 9/11 or COVID-19 were. Without immediate crisis events to respond to, he said, some carriers may be just struggling to identify their priorities.
“There is a huge upside for airlines who get this right.”
Joe Tunstall,
Senior Risk Manager and Head of Insurance, easyJet
“This is a major shock to the airline industry, but it’s not an immediate shock. Looking at it through the risk lens, it is important to not just look at the downside,” he told delegates. “There is a huge upside for airlines who get this right, and I think we’ve been very quick out of the block in terms of being the first major airline to offset our carbon. We definitely can use it to differentiate ourselves.
It was revealed at COP26 last year that 60 of the FTSE100 firms had already committed to achieving net zero, representing about £1.2 trillion of investments. Insurers were a material part of that, which has had implications for their business obligations and models.
Last year, the UK financial services regulator (PRA) required insurers to make public the way they identified and managed climate-related risks; they are also increasingly having to align their reporting with the voluntary standards set by the Task Force on Climate-related Financial Disclosures (TFCD), an international framework.
All this means that, like all other businesses looking to transfer risk, airlines will join underwriters, brokers and other partners in the aviation ecosystem under the magnifying glass of climate scrutiny, according to Rachel Delhaise, Group Head of Sustainability at Convex Insurance.
It may also mean that there will be greater competition among insurers for airlines with leading transition strategies.
“The smart money will flow to airlines with sustainable profiles, which will also serve them well in engaging with insurers.”
Rachel Delhaise | Group Head of Sustainability, Convex Insurance
“The smart money will flow to airlines with sustainable profiles, which will also serve them well in engaging with insurers,” Delhaise said. “But it's a two-way street. Airlines will also raise their expectations for their insurers. So, we need to be able to demonstrate our own strategy and profile to make sure that we are a fit counterpart.”
Insurers may also be required to broaden how they assess airline risk profiles beyond the traditional assessments of safety regimes, fleet casualties and annual profit/loss metrics, to how those clients are investing to manage the existential threats posed by climate change. Delhaise used Sustainable Aviation Fuels (SAF) , as well as hydrogen, as examples of potential investment targets for airlines, which some organisations believe is essential to achieving aviation's net zero ambitions by 2050.
A scenario analysis by the UK’s Aerospace Technology Institute recently illustrated pathways of how the global aviation sector could achieve close to net zero CO2 emissions by 2050 by deploying SAF and green liquid hydrogen technologies at scale.
While a close to net zero CO2 emissions aviation system in 2050 seems technically feasible, the associated capital requirements of producing these fuels are a significant challenge. For hydrogen to be fully ‘green’, it needs to be produced with zero carbon electricity, whether it is used to produce other SAFS, or used itself as a fuel in liquid form. Just for hydrogen, that would require an unprecedented investment, according to Professor Andreas Schäfer from the University College London’s Energy Institute.
“The challenge starts with the scale of the air transportation system.”
Professor Andreas Schäfer,
University College London’s Energy Institute
“The challenge starts with the scale of the air transportation system. Whereas we can comfortably produce these fuels on a laboratory scale, the amount of resources - of investments - is almost unimaginable to supply the global aviation system,” Professor Schäfer said. “Using demand projections for aviation energy use by 2050, to generate the electricity required to produce the hydrogen, would require an electric power generation system of about half the size of today’s, operating globally.”
“Then, of course, we would need to build the facilities to produce the fuels themselves,” he continued. “Ultimately, in monetary terms, we would need trillions of dollars of investment to build several thousand fuel processing plants in less than 30 years. So, you could describe it as another Manhattan Project, but of unprecedented scale.”
Raising investment capital on that scale cannot be achieved by one country, or one industry. Every partner in the aviation ecosystem – from policymakers and financial institutions to airlines and their insurers – will need to incentivise a transition to zero carbon behaviour.
The key to that approach will be the ability to identify and encourage only the investments that support the transition in a meaningful way. According to Dr Rooke, a meaningful transition strategy cannot just focus on measuring emissions.
“It’s not just looking at the point-in-time emissions, but where the finance needs to go and how it engages with the markets”
Dr Tony Rooke | Director, Climate and Resilience Hub, WTW
“If we just focus on the emissions at a point in time, whether you're an insurer, an investor, an airline, that in itself is not a really good way to track whether you are decarbonising the system,” he said. “It’s not just looking at the point-in-time emissions, but where the finance needs to go and how it engages with the markets.”
Finding a consistent methodology for identifying effective transition strategies will be central to the insurance sector’s ability to incentivise decarbonisation across all industry. With that in mind, WTW and partners created ‘Climate Transition Pathways (CTP)’, an accreditation framework that provides insurance companies and financial institutions with a consistent approach to identifying businesses with effective low carbon transition plans.
This ‘state-of-the-industry’ webinar series scheduled by WTW, supported the aviation sector by providing an opportunity for the industry to convene and discuss a broad spectrum of risk and insurance issues in what are proving to be challenging times for airlines.
