ESG in aviation and the African perspective
BY EKELEM AIRHIHEN.
ESG is an acronym for Environmental, Social and Governance. It is a framework for understanding and measuring how sustainably an organisation is operating. It is looking at an organisation from a holistic point of view beyond just environmental issues. It is a framework that helps stakeholders have an understanding of how an organisation is managing risks and opportunities that relate to environmental, social and governance issues. Stakeholders here go beyond investors to include customers, suppliers and employees. They have interest in how sustainable the operations of an organisation are.
From focus on health and safety, pollution reduction and corporate philanthropy has come forth ESG. This emphasis on ESG has changed how many investment and capital allocation decisions are made. The aviation industry is increasingly challenged by the requirements and expectations of stakeholders relating to ESG. It is very important that airports and industry players identify the risks and opportunities arising from ESG factors to safeguard their long term viability and resilience. The ESG risks airports should consider are not exhaustive. They are a blend of issues around Environment, Social and Governance.
Environmental criteria refer to an organisation’s environmental impact and risk management practices. Examples are direct and indirect greenhouse gas emissions, stewardship over natural resources and the organisation’s overall resiliency against physical climate risks such as climate change, flooding and fires. Things to consider are an organisation’s plan for moving towards low carbon usage. The Greenhouse Gas Protocol Standard classifies greenhouse gas emissions into three scopes. This is a tool aviation companies can look at in setting targets towards low carbon usage.
The theme of the African Economic Outlook for 2022 by the African Development Bank is Supporting Climate Resilience and a Just Energy Transition in Africa. It draws attention to climate change as a growing threat to lives and livelihoods in Africa. It states: “Despite having 17% of the current global population, Africa has accounted for a negligible 3% of cumulative worldwide CO2 emissions historically. However, climate change and extreme weather events disproportionately affect Africa, with severe economic, social, and environmental consequences for its people.” (African Economic Outlook www. afdb.org)
An organisation’s relationship with stakeholders constitutes the social dimension. These look at such factors relating to human capital management as fair wages and employee engagement. It also looks at the impact of an organisation on the communities it operates and impact on supply chain partners. This is important for African countries as there are many issues relating to environmental and labour standards.
Other issues are commitment to inclusion and diversity strategies leveraging on it to very much improve business. Commitment to product safety and quality are also considered. Impact of an organisation on the community whether positive or negative is usually considered. For instance, what are the costs and benefits of citing an airport in a community? What of that of operating an airline in a territory? How ethical are you as an aviation company in relating with suppliers and other stakeholders? How do you manage relationships along the supply chain? These are social criteria questions to be considered.
Governance refers to how a company is led and managed. Some of the questions to ask will be: how do the incentives of leadership match expectations of stakeholders? How are shareholder rights viewed? What kind of internal controls exist to promote transparency and accountability by leadership? Issues as board structure, especially board diversity, audit quality, transparency and issues around remuneration, especially executive compensation, are considered.
Aviation companies will look at compliance issues around obligations and frameworks introduced by regulatory bodies like the International Air Transport Association (IATA) and International Civil Aviation organisation (ICAO).
African countries face difficulty in implementing corporate governance systems in the public sector because of their political systems along with excessive political decisions handed down as directives from top politicians. Corporate governance issues have also been listed as a causative factor in the failure of airlines across Africa.
African aviation needs to plan towards meeting ESG requirements for long term sustainability and resilience of the industry. Industry data, risk indices, stakeholder perspective and a continuous monitoring of climate issues are some of the tools they will need to plan, analyse and transition towards ESG requirements.
Ekelem Airhihen, a chartered accountant, is an airport customer experience specialist. He can be reached on ekyair@yahoo.com and +2348023125396 (WhatsApp only)
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