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Etihad has launched a first of its kind sustainability-linked Sukuk financing in global aviation

The challenge

Integrating sustainability has been a key strategy at Etihad for several years. The company has a long-term target to achieve net-zero emissions by 2050 and to reduce 2019 net emissions levels by 50% by 2035. Etihad Airways formed a dedicated Sustainable Development Committee in November 2019 to define, foster and facilitate sustainability efforts within the organisation to ensure social, economic and environmental sustainability.

Etihad’s emission targets are more ambitious than industry body International Air Transport Association (IATA) which targets a reduction in net CO2 emissions from aviation of 50% by 2050 compared to 2005 levels.

In recent years, the company has achieved important milestones integrating sustainability into its business activities. These include adopting sustainable aviation fuels, working to develop next generation aircraft and introducing operational efficiencies. In January 2019, Etihad operated the world’s first commercial flight using sustainable biofuels; three months later it operated the world’s first ultra-long-haul flight without any single-use plastic and is currently partnering with Boeing and GE to test new green technologies. Aligning its cost of finance to achieving sustainable targets in a similarly ground-breaking initiative was a natural next step.

The solution

In October 2020, Etihad issued a sustainability-linked ‘transition’ sukuk. The first of its kind global sukuk markets and the first sustainability-linked bond in the airline industry, the bond ties Etihad’s financing to achieving company-wide ESG targets. The five-year US$600m issue is linked to KPIs around emission reduction over the next five years. If the company fails to meet its targets it is committed to purchase carbon offsets.

The bond issue followed an extensive study of transition pathways and suitable targets in the aviation sector, drawing on expertise from the International Energy Agency (IEA), Energy Transition Commissions (ETC), IATA and International Civil Aviation Organisation (ICAO). The company also completed a peer benchmarking exercise and relevant international standards to compare its targets.

Best practice and innovation

Etihad is targeting a 20% reduction in emissions intensity (so-called carbon emissions per revenue tonnes kilometres or CO2/RTK) in its passenger fleet by 2025. By aligning its reporting and disclosure to these sector-wide metrics, Etihad has ensured the relevance and materiality of its KPI. Moreover, the company’s KPI or Sustainability Performance Target exceeds the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA) target to reduce emissions intensity by 2% per annum to 2050 using a 2010 baseline.

Key challenges to the financing included working within the confines of a sukuk structure, which in contrast to standard bond issuance doesn’t allow for coupon step ups. The solution was to use an innovative ratchet structure whereby if Etihad fails to meet its KPI, it must purchase carbon offsets under the CORSIA scheme. The challenge was accentuated by the absence of any historical transactions as reference, a tight timeline and adverse credit markets due to the aviation industry being particularly hard-hit by the COVID-19 pandemic. The team managed to overcome all obstacles to close the deal within the stipulated time and went on to secure US$300m early repayment of 2021 sukuk maturity.

Key benefits

• First sustainability-linked transition issuance for the aviation sector.
• New ratchet structure for issuer pay-outs around the purchase of carbon offsets rather than coupon step up.
• Etihad’s Sustainability Performance Target (SPT) seeks to achieve a 20% reduction in emissions intensity (CO2/RTK) in the company’s passenger fleet by 2025 from a 2017 baseline.

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