From challenging leasing’s ‘business as usual’ to roadblocks for higher sustainable finance adoption, Ishka SAVi explores some of the key takeaways from Ishka’s third full-day ESG aviation investor conference in London on 13th March as well as Ishka’s seventh Ishka Investing in Aviation Europe conference on 12th March. For a third year running, Ishka ESG: Evolution, Implementation & Disclosure brought together some of the industry’s most prominent sustainability voices, from airlines and SAF players to lenders and policymakers.
Bank targets for aviation growing, but lenders wary of ‘first-mover disadvantage’
The topic of bank-driven emissions intensity reduction targets for aviation was discussed directly or in passing at several points through the conference – and was suitably timed with Ishka SAVi’s new findings confirming that 24 banks have now set 2030 targets. Despite progress by those 24 lenders, many banks including some of the world’s largest lenders have yet to release targets, and some have consciously delayed their release. “Aviation has been a challenge for us […] largely around the lack of [metrics] consensus,” commented one of those banks.
The same lender decried the “hugely different” or “entirely absent” emissions data obtained from airline and lessor borrowers. The lack of comparability of aviation emissions metrics (which associations like Impact and RMI through the Pegasus Principles are working to address) represent the largest obstacle for lenders in coming up with 2030 targets. “There is a first-mover disadvantage in this case,” commented an executive from another major lender. “You want to follow the market rather than be a pacesetter because, as things change, it can potentially curtail your business growth or affect your profitability.”
While banks may still be deciding what approach to take in aviation emissions target-setting, there is more consensus on the effect that these targets will have on banks lending into aviation. “More client selection,” affirmed one of the large lenders. “We're already starting to see that now, where certainly within our portfolio we would be disincentivised if there was something that was highly inefficient from an emissions point of view […] I could have external parties from elsewhere in the bank come and say ‘no, you can't do that transaction’,” the executive commented.
The Green Asset Ratio (GRA), a major incoming reporting requirement for EU-based banks, was also mentioned during the conference as a regulatory nudge for banks to become more selective in their lending practices. However, Ishka understands that major lenders are yet to tackle head-on what GRA (a ratio of EU Taxonomy criteria alignment) means for aviation, partly due to pending clarity around parts of the criteria and the fact that the banks’ NZBA decarbonisation target-setting effort is taking precedence.
Young and old elephants in the room
In a sector slowly transitioning towards cleaner and more energy-efficient assets, aviation finance players have long seen fleet renewal as the most effective medium-term lever to lower emissions on an intensity basis. However, the long-standing market division between new delivery (orderbook or sale/leaseback-driven) and mid-life (broadly previous generation) aircraft investment or lending strategies present two quandaries: Is fleet renewal simply business-as-usual for the former? And for the latter, is investing in previous-generation aircraft a play on prolonging the life of dirtier assets?
“This whole concept of the ‘business as usual’ fleet renewal is a consistent negative observation and I always challenge that,” responded a new aircraft-oriented leasing executive, adding that in the short-term fleet renewal is the only area “making a difference.” In the same vein, the executive spoke in positive terms of the incoming EU Taxonomy criteria, which rewards financing for latest-technology aircraft used for re-fleeting. “What’s good about [the EU Taxonomy], and we have to recognise this, is that it gives consistent, objective reporting over a longer period of time, it will demonstrate peers how we are progressing […] and if banks like this they could use it as a metric [to allocate capital],” the lessor executive commented.
The mid-life aircraft-oriented leasing executive did not dispute that trading of older assets runs counter to lowering emissions, and instead acknowledged that EU ESG legislation is “important” for putting “a floor on what the people who don’t want to do ESG do.” “We are, at minimum, doing the bare minimum which is the regulatory requirements […] and a little bit more.” They noted that ESG priorities from their large asset manager investors are already impacting deals today. “We can't go to investment committees without having multiple pages and research on the ESG aspects of the deal that we do,” the mid-life aircraft-oriented leasing executive explained.
Aircraft delivery delays hinder sustainable finance growth
Another recurring question was why sustainable finance leases have not proliferated quicker. One lawyer challenged expectations for a higher uptake of sustainable finance in a market plagued by new-technology aircraft issues reliability and OEM delivery delays. “It is really difficult for a lessor [or] an airline who is entirely reliant on the manufacturer pumping planes out at a required rate to get there,” they said, referring to deals' sustainability performance targets (SPTs) that often revolve around fleet renewal. “So, why would you penalise yourself when it is completely out your control compared to other industries?”
Ishka notes that while fleet renewal KPIs have only been used in a small number of sustainability-linked transactions, emissions intensity SPTs are inherently linked to fleet renewal, as achieving them hinges on lowering fuel burn per passenger distance.
One major lessor executive also commented that for sustainability-linked leases to become more appealing, lessors would also need sustainability-linked debt “at discount from our lender” for that discount to be, in turn, passed to lessees meeting those sustainability performance targets. “We are not going to be doing this pro-bono.” A lender also observed that the absence of emissions data from many operators was another issue in supporting the growth of those sustainable finance transactions.
The Ishka View
Aviation finance may still be at best a year away from palpable capital reactions to EU Taxonomy alignment ratios, but there is – at least in Europe – a growing belief that sustainability metrics will heavily influence the cost of funding going forward. European lenders already speak of fuel efficiency as a deciding factor in getting internal approval for deals, and banks see themselves “seeking the same” kinds of clients which inevitably will lead to “cheaper” financing for them. Interestingly, while the current market dynamic of low new aircraft deliveries amid strong air travel demand may be beneficial for lessor profitability today, it may also be hurting their self-imposed ESG targets. One major lessor executive cautioned on stage that “the need for yield” on capital deployed today could “override” self-imposed new-technology aircraft portfolio targets.
Another topic discussed by leasing firms at the conference was compliance with the EU’s Corporate Sustainability Reporting Directive (CSRD). Financial and non-financial data for the 2024 year will be required for several lessors to comply with CSRD’s first reporting cycle in 2025. Lessors at the conference displayed confidence in their ability to work together and tackle CSRD’s reporting challenges, with one large platform saying they “felt good” about how themselves and peers are progressing.
