Sustainability Strategies under Scrutiny: How Climate Reporting is Changing the Game
Market Insight 05 February 2024 05 February 2024
UK & Europe
Aviation & Aerospace
Perhaps the biggest shift in thinking presented by the climate crisis has been how to ensure that businesses and their practices become sustainable. This mounting pressure has led regulators to consider what solutions are best placed to ensure businesses act and are held accountable for their actions.
Together with considering Environmental, Social and Governance factors (commonly referred to as “ESG” in short), climate reporting has been put forward as a means of promoting a shift to more sustainable behaviour and highlighting the actual impacts of corporate behaviour. This is also spurred on by an increasing awareness and shift in consumer preferences. It requires companies to detail what they are doing to mitigate climate risk which has in turn meant that those companies failing to take action or which are not doing enough come to face due scrutiny.
Airlines are no exception. The aviation industry is consistently hailed to be ‘hard-to-decarbonise’ with a number of airlines being called out for a lack of action in the face of the climate crisis or for pushing non-sustainable practices. Since climate reporting also applies to aviation it is expected that airlines will now need to have in place effective ESG plans and climate strategies.
Whilst a number of climate-related disclosures have kicked off as voluntary measures, regulators across the globe are now looking at mandating climate reporting across all sectors. As a starting point, the Task Force on Climate-related Financial Disclosures (“TCFD”) was set up in 2015 by the Financial Stability Board (“FSB”), an international body whose role it is to monitor and provide recommendations on the global financial system. The TCFD published a list of climate-related financial disclosure recommendations in 2017, focusing on governance, strategy, risk management and targets. The recommendations, which were posited as ‘adoptable by all organisations’, were intended to highlight the financial impact of the transition to a lower-carbon economy and were considered to serve as an addition to companies’ existing public financial filings.
In late 2023 the TCFD was disbanded but not before its recommendations achieved wide recognition and adoption by several countries, including the UK, the EU, Canada, New Zealand and Switzerland. The United States Securities and Exchange Commission (“SEC”) has announced its plans to mandate ESG disclosures in line with TCFD recommendations, although this has not yet been finalised at the time of writing.
In this respect, the EU is taking action with the Corporate Sustainability Reporting Directive (“CSRD”). The CSRD builds upon the Non-Financial Reporting Directive (“NFRD”) which had largely focused on reporting on ESG factors and which incorporated the TCFD recommendations. It requires EU companies together with qualifying EU subsidiaries and branches of non-EU companies to disclose data in relation to their activities from an ESG standpoint, as well as their targets and action plans to achieve those targets and related internal policies. There are also sector-specific reporting requirements, with aviation being considered a ‘high-risk sector’ by the EU as per its Regulation 1893/2006 on the statistical classification of economic activities.
Airlines will therefore be expected to provide information specifically on their aviation activities in addition to the requirements set out in the CSRD and will likely be subject to sector-specific requirements over time. The ultimate aim of the CSRD is to improve both investors’ and the public’s understanding as to companies’ environmental impact and sustainability-facing strategies.
In requiring EU subsidiaries and branches of non-EU companies to comply, the CSRD extends its scope to third-country companies which exceed turnover-based thresholds for activity in the EU. This is very much in line with the standard EU reasoning that there should be a level playing field for companies operating within the EU. Given the applicable turnover thresholds it seems likely that numerous non-EU airlines will fall within scope.
Under the CSRD, each reporting requirement must be set out in the form of a sustainability report which should then be published as part of a company’s annual report. Different reporting timelines apply depending on the target company, with some companies needing to start reporting as early as 2025 for financial year 2024. These reports will also need to be accompanied by an assurance opinion from an accredited independent service provider. For third-country companies having a presence in the EU, the Commission has undertaken to publish on its website a list of the companies that have published a sustainability report for that year.
Whilst the consequences for non-compliance with the CSRD are to be determined by each Member State, the penalties under the NFRD can shed light on what might be expected. Under the NFRD Member States have put in place fines of up to €25,000, imprisonment for directors or fines in line with the respective company’s global annual turnover. Given the increasing urgency with which climate action is being required, it is understood that penalties for non-compliance under the CSRD might follow suit.
Simultaneously and within the wider context of managing climate risk, reporting on climate-related disclosures will no doubt have an impact on climate litigation and allegations of greenwashing. Whereas previously NGOs – being one of the key proponents of climate litigation – relied on advertising and public statements issued by companies to serve as the basis for a lawsuit, the statements and detail set out in public sustainability reports will no doubt be considered fodder for future actions. These lawsuits can be based on anything from allegedly misleading statements to inaction in the face of the climate crisis.
For aviation specifically, 2023 has proven to be rife with instances of climate litigation and greenwashing allegations, with two major airlines being sued in the EU and US respectively and with several airlines facing regulatory reprimands across the globe over their advertising. The common denominator across the board has been to target airlines’ sustainability strategies which have in reality been rather forthcoming.
With airlines becoming increasingly proactive as we head into 2024, climate reporting will likely serve as an important means to demonstrate a commitment to sustainability and to gain the trust of consumers and investors alike. However, measures such as climate reporting are just one part of the puzzle and need to be bolstered by other regulatory support and incentives. It is only through harmonised efforts across sectors and disciplines that the aviation industry can achieve its net zero goals.