Managing ESG Risks in the Aviation Industry

COVID-19 has left many of us reminiscing about travel—flights to family or foreign locations, and even work trips have taken on a rosy glow. The past few years have brought another concept into sharper focus—a goal of bluer skies and greener pastures through reduced carbon emissions. Investors, shareholders, employees, customers and other stakeholders are increasingly focused on aviation companies managing environmental, social, and governance (ESG) risks, including climate change and carbon emissions. In recent years, ESG-related issues in aviation have received ever-growing global attention, with Europe in particular focusing on air travel carbon emissions. Even with COVID-19 significantly curtailing air travel, airlines continue to focus on managing ESG risks. As customers steadily return to the skies, key considerations for the aviation industry to enhance their ESG strategies will include the scope of their carbon emissions, technological advances in aircraft and engine design, alternative fuel development, and the use of carbon credits or offsets to mitigate carbon emissions.

When a company seeks to reduce its carbon footprint as part of a broader ESG strategy, it will typically prepare a greenhouse gas (GHG) emissions inventory quantifying and classifying the company’s GHG emissions. GHG emissions are categorized into three scopes: Scope 1 covers direct emissions from owned or controlled sources (e.g., fuel combustion from aircraft and fleet vehicles) – these constitute the largest portion of GHG emissions in the aviation industry, accounting for approximately 2% of global emissions. Scope 2 covers indirect emissions from consumption of purchased electricity, and Scope 3 covers all other indirect, uncontrolled emissions occurring in a company’s value chain (e.g., employee commuting or business travel).  While most aviation initiatives are aimed at reducing Scope 1 aircraft emissions, industry participants are finding opportunities to reduce Scope 2 emissions through energy efficiency initiatives, and Scope 3 emissions through improved designs and processes.