The Corporate Sustainability Reporting Directive (CSRD) entered into force on 5 January 2023. The CSRD will require sustainability disclosures by many EU subsidiaries, potentially including the Dublin based entities of many international leasing and financing houses in the aviation sector which constitute a “large undertaking”. A large undertaking is any EU entity or EU consolidated group that exceeds at least 2 of the following 3 thresholds:

• Balance sheet total of EUR 20 million;
• Net turnover of EUR 40 million;
• Average of 250 employees during the financial year

The sustainability reporting requirements for such “large undertakings” will apply for financial years starting on or after 1 January 2025 and will include reports on plans to ensure that its business model and strategy are compatible with:

• the transition to a sustainable economy,
• limiting global warming to 1.5 degrees C in line with the Paris Agreement,
• the objective of achieving climate neutrality by 2050, and 
• where relevant the exposure of the undertaking to coal, oil and gas related activities. 

Information relating to short, medium and long term time horizons are also required to be reported.

The compliance timeline for CSRD coincides with the compliance period for CORSIA offsetting obligations also in 2025, where qualifying airlines operating flights between states participating in CORSIA (list of states) will be required to cancel sufficient eligible emissions units to cover their total offsetting obligations for the 2021 to 2023 compliance period by January 2025 and submit verified emissions unit cancellation report to their regulator by end of April 2025.

With the convergence of CSRD and CORSIA compliance pressures impacting aviation players within 2 years, it is natural to see an increase in transition, green and sustainability linked financing in the aviation sector. Already, two notable aviation specific industry groups have formed to gather consensus and industry standards around these financing products. Rocky Mountain Institute’s (RMI) Aviation Climate Aligned Finance Working Group is developing consistency and transparency in reporting to establish a level playing field for measuring progress against climate targets. IMPACT on Sustainable Aviation (Initiative to Measure and Promote Aviation’s Carbon-free Transition) works on developing more targeted KPIs in sustainability linked financing to help prevent greenwashing, assesses metrics to measure aircraft and engine efficiency and decarbonisation effectiveness and is focused on decoupling CO2 emissions trends from capacity growth, amongst other objectives.

While 2022 has seen increasingly novel financing products like sustainability linked JOLCOs and sustainability linked PDP financing, the performance targets of many sustainability linked products are often limited to fleet renewal targets and increased use of sustainable aviation fuels. Admittedly, these targets are already challenging for airlines which are currently only just experiencing a pick-up in the sector and fuel prices surging. However, with substantive positive change as the key objective for the aviation industry, it would be encouraging to see more financing based on reduction of absolute CO2 emissions and emission intensity targets.

Another key trend is that creditors are getting increasingly concerned about reputational and greenwashing litigation risk. While some of this risk is mitigated by contractual obligations between creditor and debtor on how a loan or bond issuance can be labelled in public, investors and climate activists are increasingly astute on not just analysing the individual stand-alone product financing but the issuer / debtor’s entire business as a whole. As a result, creditors have at times been keen to remove any green or even transition labels from financings. While this can be seen as a step-back for the sustainability effort, this could also be seen as sustainability considerations becoming common-place and a necessary part of any creditor or investor’s assessment of a potential debtor or investment. Essentially, the normalisation of sustainability related considerations in investments, and overall a positive trend.