Ecological pain: how are we going to finance sustainable aviation fuel?

In an article published a few weeks ago on “How Technology Became Important for Green Energy,” the Financial Times referred to a report published in February by Lancaster University and Small World Consulting, which revealed that the information and communication technology sector (ie IT) ”is estimated at approx. 1.8 to 2.8% of global GHG emissions in 2020 ”[1]. This, the FT noted, “is about the same as emissions from the aviation sector.”[2].

Always greener …

The article discusses the progress made by big tech companies like Amazon, Facebook, Google, Microsoft and Apple in greening their energy sources, using their incredible purchasing power to begin “to achieve something that matches to the lofty ideals they once espoused “. By becoming green themselves, they are also accelerating the transformation of the entire electricity system ”[3].

Despite the similarity of emissions statistics, we do not yet appear to be at a similar stage of progress in aviation in terms of energy sources. We see a constant stream of reports on the benefits of Sustainable Aviation Fuel (“SAF”) and SAF-powered individual aircraft flights or deliveries, but they all seem to note that despite the benefits we do not have. the ability to produce SAF at the scale needed to make a real difference in emissions, scaling will take a long time, and the scaling process and the fuel itself are too much anyway. expensive.

How bad is that?

The Clean Skies for Tomorrow report, released by the World Economic Forum in collaboration with McKinsey & Company in November 2020, sums up the problem:

In 2019, less than 200,000 metric tonnes of SAF were produced globally, or less than 0.1% of the roughly 300 million tonnes of jet fuel used by commercial airlines. If all publicly announced SAF projects are completed, capacity will increase to at least 4 million metric tonnes over the next several years, reaching volumes of just over 1% of global jet fuel demand forecast in 2030 … It will take time to intensify. , but investment decisions for larger demonstration plants must be made now for these pathways to contribute.[4]

These figures are not encouraging, especially in the context of the Paris Agreement target of net zero carbon emissions by 2050.

In the long run, increasing SAF’s production capacity would reduce the cost of fuel, so that over time, it would be an economically viable product for producers and airlines, and an environmentally viable way forward for airlines. existing aircraft in the industry. But, as the report notes, “hope is not a strategy”.

So what is the strategy?

The motivators described in FT’s article for Big Tech Advances include rivalry, internal employee demand for action, and – most importantly – unusually deep pockets. With aviation reeling from the pandemic rather than benefiting from increased demand as some IT companies are, airlines are unlikely to be able to show customer demand or the financial means to overcome the crisis. double the barrier of time and money on a scale that will make a difference. But we cannot afford to wait, so in the short term, and alongside existing greening initiatives (such as those that the AWG work on), the industry and its financiers will need to be creative.

  • Transition funding: This is a whole new category of loans, separate from green loans or green bonds, and designed to help emissions-intensive industries go from brown to green. As HSBC explains in its white paper on bridging finance, these industries (including aviation) “often lose out in sustainable finance due to a lack of fit between products or a sentiment. cautious of investors ”. “Transitional financing”, directly targeting these hard-to-reduce sectors, appeared to be a way to bridge this gap ”[5]. The example given by HSBC is revealing: “… an airline may use a green bond to fund biofuel research, but investors may not be willing to accept funding for a new fleet of less aircraft. carbon emitter ‘[6].

This category of funding focuses on short-term incremental improvements or outcomes (like technology upgrades, process efficiency, etc.), breaking down the larger goal of going green into smaller, more achievable steps. . This can be an attractive solution for financiers looking for ways to meet both their profitability and environmental goals, as it can be more flexible than what we see as green loans in the required use of funds. funds, and in the longer term improve the sustainability of high-performance sectors – such as aviation.

  • After-sales service: There could also be possibilities in the way the pandemic has animated the SPAC (Special Purpose Acquisition Company) market, so much so that the New York Times describes it as “a phenomenon that is transforming finance and businesses. American companies … $ 26 billion in January ‘[7]. Clearly the liquidity is there, and with a potentially monstrous appetite. The article describes a PSPC put in place so that stakeholders are only paid if the company it is buying achieves certain performance targets, so it would appear that the power of these vehicles can be used productively – and can -be directed to the developers, producers and their suppliers of SAF to relaunch the increase in capacity.
  • The life changing magic of getting organized: By continuing to look over the fence at what other industries are doing, we may also be able to take advantage of other developments in transportation, such as shipping. As Catriona Henderson explained in her recent take on (which you can read here), there will soon be 23 signatory banks of the “Poseidon Principles”, representing about 50% of all debt provided to the shipping industry. The principles of Poseidon are:

a global framework to assess and disclose the climate alignment of financial institutions’ shipping portfolios. They establish a common global baseline to quantitatively assess and disclose whether the loan portfolios of financial institutions are in line with adopted climate goals. Thus, they are also an important tool to support responsible decision-making..[8]

We could benefit from a similar organizational force in aviation finance (the “Pegasus Principles”, perhaps?), To stimulate transparency and motivation in lending practices and to focus efforts on funding for green and transitional projects – such as increasing SAF production while we wait for aircraft equipment to evolve.

This is not an exhaustive list of options, but each has the potential to be a valuable step forward on the path from brown to green.

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