Covid-19 is an unprecedented health and economic crisis, and it is still unclear how and when the aviation industry will begin to recover. Global government aid to the aviation sector has been inconsistent, with varied levels and forms of support offered to airlines and other businesses in the industry. While businesses continue to lobby governments for support, there have been suggestions that export credit agencies (“ECAs”) may need to step up, as they have done in previous crises, to fill a reduced commercial debt capacity for aircraft that is likely to exist. During the 2008-2009 global financial crisis, European ECAs financed up to a third of annual Airbus delivery output and the Export-Import Bank of the United States supported around 20% of Boeing deliveries. Given the ECAs’ unique roles in providing state supported finance, could the current crisis provide an opportunity for governments to affirm their commitment to promoting environmental, social and governance (“ESG”) accountability?
In the context of aircraft financing, ECA financing is a term used to describe transactions where state financial support is provided to purchasers of aircraft equipment exported by businesses connected to the ECA’s home jurisdiction. Such support can be provided directly by sovereign bodies, through separately mandated organisations or through state-owned corporations. In the aviation sector, this is typically done through offering financial support to purchasers either in the form of loans, state backed guarantees or insurance against non-repayment. As a result of this focus ECAs have different priorities and are subject to different regulatory constraints and reputational risks than other financing parties. While ECAs may assess risk differently (and have a different risk appetite) than commercial lenders, they will still be concerned to protect their credit standing and to avoid the reputational fallout of sustaining losses to taxpayer funds.
ECAs are also subject to a different regulatory regime to other financing parties. ECAs are subject to World Trade Organisation rules and OECD guidelines on export credit, state aid and sanctions, as well as specific disclosure and transparency requirements, which vary from jurisdiction to jurisdiction. A number of ECAs, particularly in Europe, have incorporated ESG considerations into their own internal policies. For instance, each of UK Export Finance (“UKEF”), Bpifrance Assurance Export S.A.S. and Euler Hermes have adopted the OECD Recommendation of the Council on Common Approaches for Officially Support Export Credits and Environmental and Social Due Diligence. In 2016, UKEF also adopted the Equator Principles and now as a matter of course identifies and conducts due diligence to assess the environmental, social and human rights impacts of the projects it is considering supporting.
Policy makers are no doubt acutely aware that as public attitudes to ESG issues have been changing, so too have the reputational risks of being on the ‘wrong’ side of the ESG debate increased. Most recently this has been borne out in the aviation industry by the rise of ‘flightshaming’ and the fall-out from the grounding of Boeing’s 737 Max and the scrutiny surrounding Boeing’s use of share buy-backs. The reputational impact of ESG issues on ECA supported funding is growing. This has been an issue for UKEF as recently as March 2020, when UKEF was accused of breaching OECD guidelines governing multi-national organisations in its decision to fund fossil fuel projects overseas. NGO Global Witness lodged a complaint with the OECD alleging that UKEF failed to adequately consider climate-related risks and that UKEF does not report properly on its greenhouse gas emissions or have targets to reduce emissions. The complaint, which is the first of its kind against an ECA, will see UKEF enter a 'specific instance' review process mediated by the UK national contact point at the OECD, which cannot compel enterprises to develop climate risk strategies, but which can publicly state that OECD guidelines have been broken. The recent Court of Appeal decision to rule the UK government’s policy support for a third runway at Heathrow unlawful because ministers failed to adequately take into account the government’s commitments to tackle climate change under the Paris Climate Agreement may also indicate the type of constraints and scrutiny that public bodies like ECAs will be under in relation to environmental issues going forward, although at the time of writing the Court of Appeal judgment is subject to an appeal to the Supreme Court.
In many countries, government financial aid packages have prompted heated public debate as to what businesses should be considered ‘worthy’ of government support. As the current crisis has evolved even those airlines that have been critical of previous requests by their competitors for bailouts are now seeking government assistance. The headline terms of the Air France and KLM bailout show us that governments can use the current crisis as an opportunity to demand greater sustainability commitments from the airline industry. MEPs and Greenpeace have already been vocal about their intentions to hold the French and Dutch governments to account both by pressing for details as to how such conditions are implemented and through demanding that the European Commission assesses any bailout with its Green Deal policies firmly in mind. No doubt similar pressure will also be brought to bear, on other governments providing similar bailouts, by lobby groups around the world.
At the same time there have also been troubling signs that progress with environmental initiatives may be delayed or cancelled due to the impact of the virus. There are already suggestions that the European Commission’s timetable for proposals to boost the supply and demand of sustainable aviation fuels will be delayed and Airbus has announced the end of its collaboration with Rolls Royce to develop a hybrid-electric engine citing that the project is ‘non-critical’ at this current time. As economic power shifts from baby boomers to millennials, there is also a risk that millennials, who came of age during the 2008 financial crisis and who will be left with the long term economic fallout from this crisis may view prioritising ESG issues as a luxury they can no longer afford. Given that millennials have been more likely to cite ESG factors as their top priority when considering investment opportunities, if such a swing did occur, it could be a devastating blow for all those concerned with advancing social and environmental causes.
The pandemic has highlighted in ways that could not have been imagined five months ago, the vulnerability, fragility and interconnectedness of our societies, economies and the planet as a whole. That the pandemic and many of the other recent outbreaks (SARS, MERS and avian flu) have been linked to the illegal trade in and consumption of wild animals (often endangered species) has underlined the links between human activity and biodiversity loss. The ECAs, through their role in providing financial support for exports and international trade in order to support manufacturers who draw on supply chains from across the globe, are in a unique position to influence ESG agendas.
Time will tell which way public opinion will fall on these issues however, should they favour more state activism, the ECAs could have an important role to play. ECAs have already demonstrated a willingness to promote ESG principles through the criteria they apply when assessing applications. Going forward could a case be made that the ECAs should prioritise supporting those participants in the airline industry (whether lessors, airlines or manufacturers) who are committed to not only meeting, but improving, their environmental credentials? Could additional criteria be developed by ECAs which set the bar higher than where it currently is?
The pandemic has opened the door to the possibility that some businesses will only survive if they receive governmental support. As the full impact of the crisis on public finances becomes apparent, such support is likely to become increasingly contingent on public acceptance that it is a ‘good’ use of taxpayer funds. Even without a conscious change in state policy, ECAs, as a result of existing and proposed regulations (such as the EU Low Carbon Benchmarks Regulation and Taxonomy Regulation) and the Paris Climate Agreement, may still find themselves subject to increased public scrutiny if they once again play a more pivotal role in aircraft financing.
Covid-19 has changed the stake that the public and the government have in private business - going forward the challenging question for policy makers will be whether their focus should solely be on economic recovery to take us back to the old ‘normal’ or whether the level of state support needed to get economies back up and running can be used, through the auspices of organisations such as the ECAs, to push forward an agenda which resets the balance between economic growth and environmental, social and governance concerns and which accelerates the move of the global economy to a more sustainable ‘new’ normal.