ESG in the aviation industry: a Brazilian legal perspective

Neil Montgomery

neil.montgomery@montgomery.adv.br

Montgomery & Associados

São Paulo, Brazil

Larissa Paganelli

larissa.paganelli@montgomery.adv.br

Montgomery & Associados

São Paulo, Brazil

Karen Mills

karen.mills@montgomery.adv.br

Montgomery & Associados

São Paulo, Brazil

Paula Pugliese

paula.pugliese@montgomery.adv.br

Montgomery & Associados

São Paulo, Brazil

Introduction

Environmental, Social and Governmental (ESG) policies are in the spotlight nowadays. The implementation of such policies by global companies has been increasing exponentially, particularly since the outbreak of the Covid-19 pandemic. Further, society’s awareness of measures for reducing discrimination and global warming and enhancing operational transparency, funded in part by the availability of credit in this economically unstable period, has boosted interest in pursuing solutions to ESG-driven issues. Increasingly, financiers have been looking at ESG strategies put in place by companies being financed as one basis of providing credit.

The concept of ESG was first mentioned in 2005, when the United Nations published a report resulting from a joint initiative of financial institutions recommending ‘how to better integrate environmental, social and corporate governance issues in asset management, securities brokerage services and associated research functions’[1]. The conclusion of such report, in short, was that ESG policies in the finance market would: (i) provide stronger and more resilient financial markets; (ii) contribute to sustainable development; (iii) enhance awareness and mutual understanding of all stakeholders involved; and (iv) improve trust in financial institutions.

Insofar as regulation (which is the core of this article) is concerned, this report emphasised that states should shape their legal framework in a more predictable and transparent way, requiring a ‘minimum degree of disclosure and accountability on environmental, social and governance issues from companies, as this will support financial analysis’.

ESG and the aviation industry

With regards to the aviation industry, customers are conscious of social and environmental topics and most likely choose airlines with a good ESG track record. Consequently, investors will also extend better credit to those implementing such policies. It is in this scenario that we have seen air carriers investing in ESG targets in recent years[2].

In this context, it is important to ascertain how each of those policies apply to the aviation industry and, thus, understand how aeronautical regulation, especially in Brazil, can foster the implementation of ESG.

As far as the environmental aspect is concerned, this also revolves around the initiatives of aircraft manufacturers, air carriers and airports for reducing carbon emissions.[3] This includes, but is not limited to, projects and certification of hydrogen and electric aircraft and biofuels, among others. The subject of the main environmental regulation already in place in the aeronautical sector seems to be a result of the International Civil Aviation Organisation’s (ICAO) programme of Carbon Offsetting and Reduction Scheme for International Aviation (Corsia)[4], which shall become binding in 2027.

The Covid-19 pandemic has hampered implementation of such measures by airlines due to the difficulties faced, the reduction of their operations and, consequently, financial resources (as for example, more sustainable aircraft and improvement of aviation biofuels). These disruptive times made a few governments introduce awards for airlines implementing ecological and sustainable measures in their operations[5].

Furthermore, the International Air Transport Association (IATA) launched the ‘Fly Zero’ programme on 4 October 2021, in which airlines committed to achieving net zero carbon by 2050. This aims to achieve the objectives of the Paris Accord to limit global warming to 1.5°C.[6]

The social element is a critical point for the aeronautical sector and labour issues, quality and safety in the services provided are always a concern for the industry. Therefore, diversity and inclusion measures for women, Black people and transgender people, such as engineers, as well as less discriminatory movements for travellers with special needs, have been demanded by the sector and society.

Finally, corporate governance in the aviation industry is key for its stakeholders. In a highly regulated sector, the legal framework has a relevant impact on their operation. It is, therefore, important to create a legal scenario in which there is a closer and more transparent private–public relationship to improve credit availability, particularly due to the financial loss caused to the industry by the Covid-19 pandemic. A complete and transparent deregulation agenda and, in specific cases, government actions stimulating foreign investment and foreign ownership in domestic airlines will be positive for the industry.

In light of the above, this article will provide a summary of the ESG elements within the Brazilian legal framework, focusing on the environmental aspect that has already been widely discussed in the sector, as well as the practical initiatives already taken by Brazilian aviation players.

ESG regulation in Brazil

General regulation

As far as public investments in the aviation sector are concerned, the Brazilian National Environmental Policy (Law No. 6.938/81)[7] clearly states that government financing and incentives are conditioned to compliance with environmental criteria and standards. In accordance with this law, the National Environmental Council (CONAMA) is responsible for determining the loss or restriction of tax benefits granted by the Brazilian Government, either generally or conditionally, and the loss or suspension of the ability of participating in financing programmes with official credit institutions.

CONAMA is also responsible for issuing norms, criteria and standards that condition the approval of qualified projects to the licensing of funding agencies and government incentives. Moreover, the Brazilian National Environmental Policy determines that failure to comply with the necessary measures for the preservation or remediation of the inconveniences and damages caused by the degradation of the environmental quality will subject transgressors to:

(i) the loss or restriction of tax incentives and benefits granted by the government; and

(ii) the loss or suspension of participation in financing lines provide by official credit establishments.

The Brazilian Central Bank (BACEN) is one of the public bodies responsible for issuing resolutions clarifying the above-mentioned environmental criteria and standards. One good example is BACEN Resolution No. 4237/2014, which determines the need for the implementation of social and environmental responsibility policies by entities regulated by BACEN.[8]

The ‘Renovabio’ Law (Law No. 13,576/2017)[9] created ‘Decarbonisation Credits’ (CBIO), which are issued by the producer or importer of biofuels and purchased by fuel distributors, according to targets set by the Brazilian Government. The intention is to reduce carbon emissions in the transportation system in Brazil. This regulation seeks the supply of sustainable, competitive and safe energy.

Furthermore, the new Public Procurement Law (No. 14,133/2021) asserts that the bidding process must foster innovation and sustainable national development. This provision leads to a new perspective for airport concessions, which, from now on, must have sustainable provisions in their invitations to bid.

More recently, on 26 October 2021, Decree No. 10,845/2021[10] and Decree No. 10,846/2021[11] were enacted establishing the ‘Interdepartmental Committee on Climate Change and Green Growth’ (CIMV) and the ‘National Green Growth Initiative’. They contain several guidelines seeking to encourage and support national agencies and entities, public bodies and the private sector to adopt greener measures, including, but not limited to: (i) implementation of market-based instruments and financial mechanisms for climate change mitigation and adjustment initiatives; (ii) delivery of resilient and sustainable infrastructure projects to promote fundraising and technical support for the development of regional and local actions; and (iii) incentives for the decarbonisation of transportation and the expansion of sustainable and intelligent cities.

Environmental regulation in the aviation sector

Since 2013, the Brazilian Civil Aviation Authority (ANAC) has drawn up an Action Plan[12] comprising of:

(i) a brief overview of the Brazilian civil aviation sector;

(ii) a review of the aviation kerosene consumption history and a projection for the future;

(iii) the evolution of aviation kerosene consumption and the sector's demand; and

(iv) measures to reduce greenhouse gas emissions.

The Action Plan to reduce CO2 emissions is an ICAO initiative, defined at the 37th Assembly under Resolution A37-19. The Brazilian Ministry of Transportation, Ports and Civil Aviation established a working group for the purpose of drafting and updating the Brazilian Action Plan every three years (as per Resolution No. 514/2018). Brazil’s Action Plan is in its 3rd edition[13] and describes several ongoing initiatives in the domestic market, such as operational improvements, air traffic management, airport improvements, aircraft technology development, market-based measures and sustainable aviation fuels.

In 2014, ANAC launched the National Inventory from Civil Aviation of Air Emissions,[14]to provide society with data on the evolution of air pollutant emissions and greenhouse gases by the Brazilian civil aviation sector. It also serves as input for the sector's environmental management. The Inventory contains estimates of greenhouse gas emissions (carbon dioxide, methane and nitrous oxide), and primary polluting emissions (carbon monoxide, volatile organic compounds, nitrogen oxide, sulphur dioxide and particulate material). The calculations are done per flight and consider all movements to and from domestic airfields, except those relative to helicopters, military aircraft and agricultural aircraft powered by ethanol. The estimates use Tier 1 and Tier 3a methods.

The Inventory presented in 2019[15] can be a useful instrument for the development of fuels that have a reduced impact on the environment, especially renewable fuels.

As introduced above, ICAO determined that its member states work together to reduce CO2 emissions from international aviation from 2020[16]. For such purpose, in 2016, ICAO’s members adopted Corsia, a pilot project started in 2021 with almost 100 participating countries, with the rest expecting to embark by 2027. Under Corsia, the airline industry has announced plans to cut emissions by half by 2050, when compared to 2005, and develop tools to achieve carbon-neutral growth for international air travel from 2020.

In the context of the foregoing, ANAC issued Resolution No. 496/2018[17] seeking to monitor, report and verify CO2 emission data relative to international air transportation in line with Corsia targets.

To ensure that the measurement method and recorded data has been correctly applied by domestic airline operators, an independent verification body must give them a Checking Report based on ISO 14065 (specifying greenhouse gas management and related activities), ISO/IEC 17011 (specifying requirements for the competence, operation and impartiality of accreditation bodies) and ISO 14064-3 (specifying principles and requirements and providing guidance for those conducting or managing the validation and/or verification of greenhouse gas assertions).

Non-compliance with the obligations laid out in this Resolution will subject Brazilian airline operators to the application of fines.

In view of the foregoing, the three main Brazilian airlines have already embedded ESG principles into their goals and operations. In this regard, GOL Linhas Aéreas Inteligentes S/A implemented a specific section of ESG on its Investor Relations website[18]and was the first company in Latin America to commit to a zero carbon balance by 2050, seeking to develop new technologies for aircraft and engines (including the production of biofuels and biokerosene technologies); continuous operational improvements (eg, airspace optimisation); better use of infrastructure and logistics; and market-based measures (offer the possibility of CO2 compensation by passengers with tokenised carbon credits).

As previously mentioned, these pillars were defined by ICAO and confirmed by IATA. Consequently, Brazilian and international airlines operating in Brazil also have developed and disclosed sustainable goals, such as Azul Linhas Aéreas S/A [19] and LATAM Airlines Brasil,[20] which also includes new generation aircraft with lower fuel consumption, a comprehensive programme of social accountability, including volunteer and community assistance programmes, and the implementation of a system to address their environmental impacts by 2025 for obtaining IEnvA certification,[21] issued by IATA. Orders for e-VTOLs by Brazilian airlines were also seen as a key for the implementation of a greener air transportation.[22]

In 2019, ANAC created Sustainable Airports[23], a programme monitoring the development of environmental management at airports and disseminating sustainable initiatives adopted by airport operators, promoting the reduction of civil aviation impacts on the environment. It is a non-regulatory incentive instrument that counts on the voluntary adhesion of airports, which are evaluated by their airport sustainability practices. The results of the programme make up the Environmental Performance Index of the Brazilian Ministry of Infrastructure. This index aims to verify the qualitative evolution and the social-environmental commitment of the transportation sector in Brazil.

More recently, in December 2020, the Brazilian Ministry of Foreign Affairs submitted to the United Nations Framework Convention on Climate Change (UNFCCC) the new Nationally Determined Contribution (NDC)[24] to the Paris Accord, which is Brazil's main international commitment in the area of climate change. Brazil's NDC reaffirms the commitment to reducing total greenhouse gas emissions by 37 per cent by 2025, and officially commits to reduce Brazilian emissions by 43 per cent by 2030. The NDC also determines zero net emissions by 2060. This long-term goal may be revised in the future.

Upcoming Brazilian projects

The Brazilian Securities Commission (CVM) held a public hearing in March 2021 on the draft amendment of its Instruction No 480, seeking to improve the provision of data relative to environmental, social and corporate governance (ESG) issues. The amendment has not been issued, but this data is intended to indicate compliance with new ESG requirements and to allow comparisons by investors.

On 14 May 2021 in the House of Representatives, Congressman Ricardo Barros filed a bill of law creating a national programme for biofuels, including a schedule for green diesel and aviation biokerosene. Pursuant to the proposal, in March 2027, the use of both fuels would be mandatory throughout the country, in mixtures with their similar fossil fuels at two per cent.[25]

Conclusion

The aviation industry, especially in Brazil, must be prepared and aligned with ESG principles not only to achieve ICAO’s and IATA’s targets and avoid penalties imposed by aeronautical and environmental authorities, but also to play its role to ensure a greener and more sustainable aviation market and world. Society’s desire to consume greener products/services will compromise such targets and will press companies to meet them, as well as introducing ESG policies in their investments, due diligence and daily operations. This is because there is a rising worldwide financing tendency for lenders to require those policies and elaborate ESG scores among borrowers.

That being said, the Brazilian legal framework, despite still being in a fledging state, has been trying to follow such society and finance market trends, issuing rules and launching programmes for leveraging ESG policies, some of which are especially related to the aviation industry. It is important, therefore, that such rules are aligned and unified to incentivise these goals and provide precise and clear parameters on how to achieve it, not removing the duty of society to also aim at such purposes and to cooperate to this end.