Airlines are facing a multitude of emerging environmental, social and governance (ESG) risks and their ability to manage them is being complicated by the slow formation of mitigation strategies, a lack of coordinated reporting schemes …. and a new breed of industry watchdogs.
Those were just some of the messages delivered to delegates at WTW’s 20th annual Aviation Conference held in Phuket, Thailand, just weeks after the UN’s Intergovernmental Panel on Climate Change issued its ‘final warning’ to “massively fast-track climate efforts by every country, every sector and on every time frame” or face not meeting the objectives of COP21.
Far from theoretical or ‘future’ risks, there is growing evidence that global warming already affects airline operations; pilots are increasingly having to navigate through volatile pockets of clear-air turbulence that in some markets are now the most common cause of accidents.
Audience members were reminded that reaching aviation industry decarbonisation goals, such as Net Zero by 2050, will require commitments from groups beyond IATA members. Strategic partners, such as lessors, will need to play a role that at least reflects the size of their influence on the industry.
According to the latest report by KPMG on the aircraft leasing sector, the operating leasing share of the global fleet currently sits at around 55%, peaking at above 60% during the recent COVID-19 pandemic.
The report’s authors believe the airline leasing business model is compelling enough to ultimately dominate the industry.
“It’s very possible, eventually, that lessors will own all of the aircraft. Clearly some airlines will always either want to own their own aircraft but the 60% share is here to stay,” the report notes. “Airlines are going to use the sale-leaseback channel to fund deliveries or lease more aircraft, because it makes more sense in a volatile environment to have a more flexible business model.”
The leasing sector has taken some steps to support the aviation industry’s transition to a lower-carbon operational model; the ALI Sustainability Charter, for example, has created the first set of ESG and climate-aligned principles for the aviation industry to promote collaboration and ambition in the lessor community.
However, given the sector’s current and potential dominance as aircraft owners, its unsurprising that delegates and panelists alike in Phuket were eager to see lessors take an even more active role in the industry’s ESG-related efforts.
With social demands growing for high-emitting businesses to clean up their act, there are obvious brand-related benefits from recognition as an environmental leader. But the latest research from the World Economic Forum (WEF) also suggests there may be a direct financial benefits for shareholders in comparatively high-performing companies on the carbon emissions front.
The WEF looked at the trading prices for 287 regulated companies across all sectors from 2005-2017 and found high-emitting firms were likely to trade at a discount on the stock market, and/or they would need to offer higher returns than their low-emitting peers to attract investors.
“Firms that emit more than their industry peers, on average, trade at a discount of 37.5%, while firms that emit less than their industry peers trade at fair value on average,” the report said. “[They] have a strong incentive to decarbonise operations, as investors reward firms with credible commitments to the environment.”
Like-minded sentiments expressing the commercial opportunity inherent in seamless transitions to more ESG-friendly business models, were expressed in Phuket.
“We are keeping our eye on the opportunity coming down the track … as we move to a whole new economy,”
Christopher Au | Head of WTW’s Climate and Resilience Hub Asia Pacific
“We are keeping our eye on the opportunity coming down the track … as we move to a whole new economy,” said Christopher Au, the head of WTW’s Climate and Resilience Hub Asia Pacific. “We are looking at how as risk advisors, we can drive the most collaborative behaviour across the value chain, so that we bring the unique capabilities of insurance to support the transition.”
Those sentiments were echoed by Rachel Delhaise, Head of Sustainability at Convex, a speciality insurer and reinsurer. “We are leaning into the transition, because it is the responsible thing to do, and because it is also a huge commercial opportunity.”
However, there appeared to be a degree of disconnect between the stated ESG goals of some companies and their ability to meet them.
For one, a snap poll of the audience in Phuket found that only 14% of 154 survey respondents worked for companies that were “actively monitoring and reporting ESG metrics”; similarly, only 11% of 161 respondents expected the aviation industry to meet its 2050 targets for emissions reductions.
11 % of 161 respondents expected the aviation industry to meet its 2050 targets for emissions reductions.
These results mirrored those from a wider industry survey of risk managers conducted by WTW last year in which 74% said that improving ESG ‘scores’ was a core focus for their business, but only 17% had documented ESG risk management targets, with clear milestones.
More than three quarters (77%) of executives polled in that survey said they believe that the risk management function should take a more active role in ESG initiatives and strategy.
Delegates in Phuket also heard from a legal expert about a rise in litigation against corporate greenwashing and new breed of claimants who appear less motivated by financial compensation than their predecessors.
Tom van der Wijngaart, a Partner at Clyde & Co, told an attentive audience that, in some cases, claimants were no longer interested in settling; rather, their cases were brought to force a change in corporate behaviour and/or for brands to be impacted.
He suggested that the types of litigation most applicable to airlines at present were related to allegations of greenwashing and false advertising and suggested that diligent horizon scanning, assessing how cases brought in other industries could ultimately apply to airlines, was growing in importance.
Clearly, for airlines, the transition to ESG-friendlier business models will be complicated and hard to measure. And it is not being made easier by the current environment in which dozens of data vendors are trying to establish their ESG performance metrics.
According to a KPMG report released earlier this year, industry-wide, more than 150 vendors are currently offering their own strategy for performance measurement, each with unique “definitions and methodologies on materiality, intentionality and additionality”.
According to Charlotte Dubec, ESG Lead for WTW’s Global Aerospace division, the scramble of companies looking to secure their slice of the ESG reporting pie is creating a situation where, even when organizations are trying to do the right thing, their progress is being slowed by a lack of clarity on what to measure and how to measure success and failure.
“We could be reaching a point where the sheer volume of ESG metrics is forcing organizations to spend time and resources on reporting, rather than focusing on innovation and finding ways to meet the current challenges,”
Charlotte Dubec | ESG Lead for Global Aviation & Space
The KPMG report goes on to describe the current lack of templates with consistent definitions and reliable corporate ESG performance data ‘sustainability’s Achilles’ Heel’.
As airlines and their ecosystem partners come under increasing pressure to create more sustainable business models, the transition will see new types of risk emerge from a cross section of new environmental demands, technologies, social expectations and regulation.
Emerging ESG risks will be firmly on the agenda for WTW’s Airport Conference, taking place on 8-10 November 2023 in London.
As one of the leading brokers to the aviation industry, WTW is well placed to help companies identify those risks and offer solutions that will help mitigate the impact on their businesses. We offer a smarter way to risk.
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