The Aviation Working Group (AWG) has released the First Edition of the Manual on Best Practice under and Interpretation of the EU Taxonomy for Sustainable Activities (the EU Taxonomy).
The EU taxonomy is a cornerstone of the EU’s sustainable finance framework and an important market transparency tool. The EU taxonomy is the EU’s classification system that provides criteria for economic activities to be aligned with a net zero trajectory by 2050 and the EU’s broader environmental goals.
The Best Practice Manual is issued jointly by AWG and the International Air Transport Association (IATA). Summarised in an accompanying PPT, it addresses the technical screening criteria for the manufacturing of aircraft, the leasing of aircraft, and the passenger and freight air transport.
The Aviation EU Taxonomy Best Practices Manual has been produced based on over four years’ discussion, negotiation and consultation with the European Commission, European Union Aviation Safety Agency (EASA), aviation industry participants and auditors. Without limiting its other uses, this guidance document has been prepared in the context of reporting requirements under the EU’s CSRD regime.
“We’ve been working on environmental issues for over 20 years,” said AWG secretary general Jeffrey Wool, speaking to Airline Economics. “We’ve had a dedicated group assess and engage with authorities on such issues. Over the last five to 10 years, that work has intensified and accelerated.”
The contributing industry members include the 350 airline members of IATA, a number of lessor and manufacturer members of AWG, and a number of nonaffiliated airlines and industry members.
The Best Practice Manual, which will be updated by IATA and AWG (reflecting engagement with industry members, regulators and external auditors) from time to time as events warrant, will play a key role in connecting the requirements of the EU Taxonomy to industry practices, with a developed analysis. The approach is to provide detailed and consistent rules, applied through the lifecycle of covered assets in view of customary operations and transactions.
AWG hopes that this document will help promote the aims and purposes of the critically important EU Taxonomy, a cornerstone of the EU’s sustainable finance framework, as a core pillar of the industry’s transition to net zero and in support of the broader environmental and sustainability aviation activities.
“[The taxonomy] has no independent operative force impacting behaviour, but it has a great effect as it will be referred to, we expect, in a wide range of contexts over the years,” continued Wool. “This could include on bank capital requirments, export credit eligibility and terms, and taxation.
“The immediate application is financial reporting for a few large European airlines and OEMs for 2024. This is a relatively small group, but a very important, including given the intial application.
Watson Farley & Williams supported the team in preparing the Best Practice Manual, and played a central role in drafting and working through textual issues.
“The main purpose to help the industry understand, interpret, and apply the technical screening criteria in each case on a consistent basis, especially in light of the practricaliites of the avaiation sector,” said Wool.
The taxonomy document is a European-wide document that contains technical screening criteria that apply to aviation. It is a part of the EU’s wider efforts to influence meeting emission reduction targets. The criteria essentially tries to work out whether an “economic activity” meets sustainability or ‘green’ standards for each type of sector – beyond just aviation.
The EU taxonomy covers five key areas in its technical screening criteria: contribution to climate change mitigation and adaptation; sustainable use and protection of water and marine resources; transition to circular economy; pollution prevention and control; protection and restoration of biodiversity and ecosystems.
The manual covers the areas pertaining to aviation, covering economic activities related to airlines, lessors, OEMs, and MRO businesses. “The taxonomy is largely a political document and was drafted as such.
Various parts of the European Commission did not necessarily and specifically on basic elements, thus the generalized drafting, which is hard to apply in practice,” continued Wool. “Whenever you have a diverse committee drafting, things are vague, inconsistent, and there are even errors. That clearly happened here.
“Moreover, as a political document, the text did not pay attention to the commercial side of our industry. For instance, it did not address how these provisions apply to a sale-leaseback or sale.”
The manual, then, was produced to bridge those gaps in the taxonomy document, whilst simultaneously providing a “best interpretation” to apply it.
AWG played a critical role in the development and drafting of the Cape Town Convention. The treaty supports asset-based financing and leasing aviation equipment, enhancing financing opportunities, reduction of costs – providing legal certainty and asset security in such transactions.
This, in essence, laid the foundation for contemporary aircraft transactions through the establishment of an International Registry, which allows for online registration of interests in aviation assets.
“When you have new rules, like the Cape Town Convention or like the taxonomy, these develop over time as more information is provided through practice,” said Wool. “The first wave of reporters are going through a process with their auditors. Much will be learned - which is going to be relevant for leasing companies that need to report next year.”
The WFW team that centrally supported the drafting of the Aviation EU Taxonomy Best Practices Manual included global aviation and aerospace sector head Jim Bell, Singapore partner Richard Williams and London senior associate Michael Keightley.
Speaking to Airline Economics, Bell commented: “At some point, [the EU taxonomy] will affect the cost of funding by European financiers depending upon whether or not an economic activity is considered green. When that happens, capital adequacy treatment will be adjusted by reference to either a ‘green’ discount factor or a ‘brown’ penalizing factor.”
These discounts or penalizing factors have yet to be determined and how it will be formally integrated into financing activities.
“In the context of the European Green Deal, and has been noted more generally, there is an intention that the EU taxonomy will extend to taxation,” continued Bell. “As this all gathers steam, you recognise – maybe not immediately but for the long-term – how important it is to get the EU taxonomy position correct because it will have a far reaching and economic impact on businesses.”
As part of the EU taxonomy, ICF – a consultant to the European Union Aviation Safety Agency (EASA), supporting the Commission – produced an analysis of eligible aircraft technology for 2024 reporting purposes. The ICF outlined projections regarding in-production aircraft models and associated engine variants that may be in scope of the EU taxonomy. The ICF document covers aircraft manufactured by Airbus, Boeing, ATR, and Embraer. However, China’s COMAC is not covered by the ICF document.
“We understand that ICF sough to engage with all relevant OEMs, but there was no engagement from COMAC,” explained Bell. “As a result, COMAC could not be referenced in their document. However, it could still theoretically meet the relevant requirements.”
A fundamental component of the manual is its adaptability to the ever-evolving nature of the green economic landscape.
“A key part of this is we will be modifying it from time to time as events warrant and they will so warrant pretty quickly,” said Wool. “We’re going to get a lot of information out of this first reporting cycle.”
While there is still work to be done, the publication of the manual signals a significant obstacle overcome by a huge collective effort.
Bell said the publication of the manual was the “result of significant hard work, discussion and collaboration” with many industry parties.
Wool added: “Whilst many have been involved in work on the Aviation EU Taxonomy Best Practices Manual, with AerCap deserving special credit for its thoughtful approach and sustained efforts, there is no doubt that without WFW’s central role the document would not have been produced. The firm displayed highest level industry knowledge and legal skills to help bring this document together”.
The manual will serve as an essential tool to the entire aviation industry. The manual can be accessed through AWG’s website: https://awg.aero