Heathrow Airport’s debut €650m sustainability-linked bond and a €400m SLB for Aeroporti di Roma show that the high-emitting sector is aiming to tackle its carbon footprint, although questions remain over the industry's expansion plans.
Heathrow Funding’s benchmark 10-year euro-denominated SLB is the first from the sector to have key performance indicators that address interim 2030 targets approved by the Science-Based Targets initiative and align to limiting global warming to 1.5 degrees. It could be a blueprint for other high emitters due to its transparency on Scope 3 emissions across its value chain.
“Heathrow’s SLB is highly innovative for the sector and for those sectors considered hard to abate ... It’s the first time for the airport sector that full Scope 3 has been embedded in the KPIs and an interesting milestone in this fast-evolving market,” said Stephane Marciel, head of sustainable bonds at Societe Generale, which structured the SLB.
Relatively few companies have presented a full picture of their carbon footprint in SLB structures to date but this is expected to change as more companies follow the EU's Sustainable Finance Disclosure Regulation.
In April 2021, ADR was the first airport to issue an SLB, although that deal was criticised for failing to include aircraft emissions. Its new deal again focuses on Scope 3 emissions per passenger rather than aircraft, highlighting the difficulties of transition in a sector that is still struggling with a lack of alternative technology and low take-up of sustainable aviation fuel.
ADR’s KPIs and sustainability performance targets include net-zero absolute Scope 1 and 2 emissions by 2030 from a 2019 baseline, and reducing Scope 3 net emissions per passenger by 30% in the same period (excluding aircraft) and committing to maintain Airport Carbon Accreditation Level 4+ when reviewed in 2030. The deal has a maximum step-up of 120bp if the targets are not met.
One step beyond
Heathrow went a step further in a deal that it modestly described as an "industry-leading trade" that was two years in the making and followed the company's refreshed Heathrow 2.0 strategy in February 2022. It chose two KPIs that focus on absolute emissions reduction which it split into “in the air” emissions from aircraft operations and absolute “on the ground” emissions from airport operations.
These are considerable, as Heathrow is Europe's busiest airport and the eighth busiest in the world. It is now operating at 95% of pre-pandemic levels and forecasting a 20% rise in passenger numbers to 74 million in 2023 compared with 2022. CFO Javier Echave said it is investing in building capacity, which includes a possible third runway.
Heathrow's first KPI covers “in the air” Scope 3 emissions, which make up 95% of the airport’s carbon footprint, including take-off and landing operations up to an altitude of 3,000 feet and cruise phases for departing flights.
The second KPI links to “on the ground” emissions, which cover Scope 1, 2 and 3 emissions from buildings, supply chains, airport vehicles and employee travel and make up the remaining 5% of emissions. The deal is also supported by a supplier engagement target to have 67% of Heathrow’s suppliers by emissions having science-based targets by 2027.
The sustainability performance targets specify a 10% cut in carbon emissions in the “in the air” KPI by the end of 2026 and 15% by the end of 2030 compared with a 2019 baseline. The “on the ground” KPI targets a 26% cut in carbon emissions by 2026 and a 46.2% cut by 2030, giving a 100bp maximum cumulative step-up.
The commitment to reduce absolute "in the air" carbon emissions gained "good investor feedback" during roadshows, according to a banker involved in the deal.
The 2019 baselines for Heathrow's KPIs were externally verified by assurance provider ERM CVS and Bureau Veritas has verified Heathrow's CO2 emissions data from January 2020 to December 2022.
Second-party opinion provider DNV said that the public absolute emissions reduction commitments were “leading” in its peer group and said Heathrow's targeted reduction was three times the amount of its nearest rival.
Coming clean
Heathrow's goal is for 2019 to be the year of "peak carbon". But its challenge will be to implement emissions reductions while expanding – especially if it builds a third runway.
Airport expansion remains controversial but is not necessarily incompatible with Heathrow's SLB targets, which focus on absolute emissions, rather than emissions intensity.
ESG specialists say full disclosure on emissions, along with a clear corporate strategy that details the steps that companies will take to deliver their net-zero agenda, is the best way for high-emitting companies to convince investors that their transition is credible and on track, in addition to science-based targets and external verification.
"We all know Scope 3 calculations are challenging. That being said, some companies are extremely well advanced, including [companies from] other carbon-emitting sectors and it is the way forward," Marciel said.