SUSTAINABILITY REPORT
The sustainability challenge – defined in three key drivers
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Three drivers are shaping the progress of sustainability in business aviation. Here’s how high-performing businesses are responding to the challenges. Words: Alan Cunningham and Alwyn Hopkins, EY Law
ON MARCH 30th 2023, the UK government followed the EU and US by releasing a swathe of new sustainability policies. These ranged from further detail about the upcoming UK Sustainable Aviation Fuel (SAF) mandate to a proposal to regulate the provision of Environmental, Social and Governance (ESG) ratings.
In addition to evidencing policy-driven movement towards net zero, the breadth of the latest policy announcements highlights the enormous task ahead for the business aviation sector, which will need to navigate an evolving world of ESG reporting requirements, regulation, and incentives.
This article examines three key drivers of sustainability action in the business aviation sector. It also summarises how high-performing businesses are responding to the challenge.
Neste plans to scale up production at its refineries.
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Driver 1: ESG disclosure regulations
From the US’ Securities and Exchange Commission (SEC) climate disclosure rules to the EU’s Corporate Sustainability Reporting Directive (CSRD), new mandatory sustainability disclosures are increasingly prevalent and challenging to comply with. This has created a business obligation to obtain new levels of transparency over the value chain and to share much of this information with the market. The latest on requirements in two trailblazing jurisdictions, the UK and the EU appears below.
The UK’s disclosure rules notably include those under the TCFD (Task Force on Climate-related Financial Disclosures). Climate-related financial disclosures are required by UK listed companies, banks and other financial firms.
TCFD will play a key role in achieving the UK’s ambition to be the world’s first net zero-aligned financial centre. It’s also closely linked to the UK’s Transition Plan Taskforce (TPT). This group aims to establish best practice for transition plans and to develop guidance and a set of transition templates for aviation businesses.
In October 2022, the TPT published proposals for Sustainability Disclosure Requirements (SDR) and investment labels, initially applying to asset managers in respect of their UK fund products and portfolio management. The aim is to combat potential 'greenwashing' by requiring firms to back up the sustainability claims they make and restrict the use of terms where a product does not meet the criteria to qualify for a climate or sustainability-related label.
UK banks and insurers operating in the business aviation sector are already affected by TFCD, as are UK listed OEMs, supply chain firms and operators. However, by targeting financial markets, the UK government seeks to ensure that ESG considerations will drive capital allocation – yielding market-wide effects.
In the EU, CSRD took effect on January 5th 2023. This means that EU member states now have 18 months to integrate CSRD into their national law.
This replaces and significantly broadens the scope of the EU’s existing rules, the Non-Financial Reporting Directive (NFRD) and aims to improve the quality and comparability of ESG disclosures.
CSRD requires affected companies to publish ESG reports in a clearly identifiable, dedicated section of the company’s management report. Submitted sustainability data must be audited externally to ensure that the provided data is accurate and credible.
In broad terms, CSRD applies to all EU listed companies and all EU companies or EU subsidiaries of non-EU companies meeting two out of the three following criteria. First, net turnover higher than €40m ($44.5); second, balance sheet assets higher than €20m ($22.3); and/or more than 250 employees.
There are derogations for small and medium-sized enterprises (SMEs). And there are slightly different criteria for banks and insurance companies.
CSRD will also eventually apply to non-EU based ultimate parent companies with turnovers higher than €150m that have EU subsidiaries or branches.
Reports will be based on European Sustainability Reporting Standards (ESRS) published by the European Financial Reporting Advisory Group (EFRAG). EFRAG has submitted its first set of 12 ESRSs for adoption, which include sector agnostic standards on climate change, pollution, workforce, supply chain workforce and business conduct.
Non-compliance with CSRD reporting obligations may prompt civil and/or criminal enforcement action, while it is likely that poor quality disclosures will have a negative impact on market perception.
Driver 2: Taxes, charges, grants, and incentives
Fiscal policy targeted at sustainability is evolving at a rapid and increasing pace, as evidenced by the EY Green Tax Tracker. In the 46 jurisdictions covered by the tracker, there are more than 1,950 sustainability incentives now available, and over 3,000 environmental taxes and exemptions. Worldwide, there are also now more than 80 carbon pricing initiatives in operation.
These measures typically enhance the business case for decarbonisation, in addition to imparting a compliance obligation for businesses.
Three key measures for the industry include: Carbon Border Adjustment Mechanism (CBAM), CORSIA and Grants, credits and incentives.
CBAM is of particular note to airframe, engine, and component OEMs. This will levy a price on the carbon emitted during the production of carbon intensive goods imported into the EU (for example aluminium). The importation of aircraft into the EU is not covered by CBAM but we expect to see EU manufacturing footprints significantly affected by new costs on aircraft components.
The UK is currently consulting on the implementation of a similar regime, and other markets, including Canada, are also considering such a policy.
The Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA) is notable for operators of international flights with CO2 emissions of 10,000t or more. CORSIA is a global offsetting scheme whereby aircraft operators will offset growth in CO2 emissions. It was introduced by the International Civil Aviation Organization (ICAO) and applies only to international flights.
Although it will not become mandatory until 2027, CORSIA has been adopted on a voluntary basis by many states. The UK is set to bring it into law through the Air Navigation (Carbon Offsetting and Reduction Scheme for International Aviation) Order 2021. This applies to UK-registered aircraft of operators that produce annual CO2 emissions greater than 10,000t on international flights. This applies to jets with a Maximum Take Off Weight of more than 5,700 kg.
It requires operators to annually submit a copy of their verified Emissions Report and a copy of the associated Verification Report to the regulator, which is the Environment Agency in England.
Importantly, CORSIA contains a concept of CORSIA Eligible Fuel, meaning operators may use SAF and lower carbon fuels to reduce their offsetting requirements.
“The transition towards sustainability priorities is not slowing down.”
Turning to Grants, credits and incentives, in addition to standing innovation incentives schemes such as R&D tax credits, many jurisdictions are making discretionary funding available to encourage investment in the decarbonisation of aviation, such as the EU’s ReFuelEU Aviation initiative, the UK’s Advanced Fuels Fund, and the US’ FAST-SAF Grant Program.
These funding pools can help businesses investing in decarbonisation measures to accelerate and amplify spend on innovation and capital to accelerating the industry’s net zero transition.
SAF producers, like Neste, are seeing various jurisdictions apply policy levers to drive SAF adoption.
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Driver 3: SAF Mandates
Jurisdictions such as the EU, US, and UK are applying policy levers over and above CORSIA and fiscal measures to drive SAF rollout and adoption.
In 2022, the UK launched its Jet Zero Strategy, setting out how it would deliver on its commitment to reach net zero aviation by 2050.
SAF is one of six key measures in the Jet Zero Strategy and the UK confirmed in 2022 the introduction of a SAF mandate from 2025, namely that, by 2030, at least 10% of jet fuel should be made from sustainable feedstocks.
The UK also confirmed that the SAF mandate will be a greenhouse gas (GHG) emissions scheme under which SAF will be awarded with tradeable certificates (hence the relationship with CORSIA).
The obligation to supply SAF will be on aviation fuel suppliers and there will be requirements as to what constitutes SAF. Wastes and residues (such as biomass and recycled carbon fuels) and low carbon electricity (renewable or nuclear) will all be permitted. Crop-based biofuels will not be permitted. SAF made from hydro-processed esters and fatty acids (HEFA) will be capped to avoid diverting feedstocks from road transport.
As the UK pursues its SAF policy, March 2023 saw the release of a consultation which now seeks industry views on the detailed design of the UK’s SAF mandate so that legislation can be prepared in time for 2025. This closes on June 22nd and indicates continued support for the transition to SAF necessary to decarbonise the aviation industry.
How are aviation businesses responding?
Deploying new tech takes time to implement.
AS EVIDENCED by the groundswell of sustainability policy and its impact on the industry, the transition towards sustainability priorities is not slowing down.
With the aviation industry reportedly responsible for 2.5% of global CO2 emissions, we can expect drivers of decarbonisation in particular to accelerate in application to the aviation industry – requiring investment, transparency, and transformation.
We are seeing the highest performing aviation businesses ensuring they have coverage on five key areas in their response:
1. Implementation of effective sustainability governance
Given the array of sustainability priorities identified for aviation businesses, it is important to implement a sustainability responsibility matrix on a cross-functional basis. This should cover not just ESG disclosures but also new tax and regulatory measures (for example CORSIA) funding, and wider corporate transformation.
2. Monitoring of changing policy and stakeholder drivers
As the macro-environment is developing rapidly, these developments must be monitored to ensure business impacts are identified and responded to; ranging from new regulatory measures to new demands from the supply chain, funders and other investors. The General Aviation Manufacturer’s Association (GAMA) together with International Business Aviation Council (IBAC), National Business Aviation Association (NBAA) and European Business Aircraft Association could play a role in helping OEMs and operators in horizon scanning – enabling the sector to identify and respond to the changing ESG environment.
3. Development of a targeted transformation plan
With drivers of change increasing in materiality, it is vital for aviation businesses to plan their response to these change priorities now. Development and deployment of new technologies, changes to the supply chain, and new funding structures all take time to implement. So beginning the decarbonisation planning proactively enables more effective responses to the new demands facing the industry.
4. Management of corporate and value chain change
While overarching corporate transformation can be a longer-term endeavour, many key policy drivers are coming into force in the short term (for example EU CBAM obligations begin in October 2023). Consequently, effective businesses are already putting change management in place and activating resources to deliver it.
5. Reporting and the building of trust
Planning and delivering business change is not enough to build market credibility. Encouraged by disclosure regulations such as CSRD and TCFD, we are seeing increasing importance of ESG disclosures and ratings to financiers and the supply chain alike. Ensuring effective ESG reporting (and assurance) will prove increasingly pivotal to building commercial credibility for investor and community trust in business aviation.
For more information about these topics, please contact the authors.
About the authors
Alan Cunningham is a partner at EY Law and leads the firm’s private aviation legal practice.
Alwyn Hopkins is sustainability leader for EY’s UK and Ireland Advanced Manufacturing and Mobility (AM&M) practice.
