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Following TCFD’s recommendations on climate-related financial disclosures in 2017, pricing climate-related risks into financial decision-making has become a key part of tackling climate change. The aviation sector is particularly vulnerable to the transition and physical risks from climate change. Owing to its nearly exclusive dependence on petroleum jet fuels, the sector may face drastic changes in aircraft and fuel technologies, climate regulations, and market demand in its transition towards net zero. Additionally, the global scale of air transport networks means that airports and airlines could be materially impacted by all kinds of physical damages from climate change, such as extreme heat events, coastal floods, winter storms, and increased clear-air turbulence. The long-term horizon and non-linear nature of climate-related risks make it inherently challenging to quantify the financial impacts of transition and physical risks in aviation, even more so when it comes to measuring their combined effects and interplays holistically. In response to the fast-growing needs of the aviation sector to understand its exposure to climate-related risks, this project aims to offer one of the first in-depth sectoral-level scenario analyses that encompass both transition and physical risks and develop a framework that translates the climate risks into quantifiable financial risk metrics. Applications in practice
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Contribution to CISL’s core research themes
Zero carbon
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Protection of nature
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About the project
This project is developing climate scenarios that integrate transition and physical sources of climate risks for the aviation sector. Through the application of both qualitative and quantitative research methods, the project will provide a comprehensive database on all climate-related risks in aviation, while also exploring the links between transition and physical risks, their material impacts to airports and airlines. The research focuses on what actionable strategies can be adopted by the aviation sector to improve their climate risks management and to price climate-related risks in long-term investment decisions. This project has the potential to provide a repeatable, systematic, and transparent approach for climate scenario modelling that can be applied to other economic sectors for their climate risks analyses.
Impact and relevance
Climate-related financial disclosures as a key step to drive the greening of the international financial system are increasingly embodied in the decision making of central banks (e.g., Bank of England, Banque de France), MDBs (e.g., EBRD), and across economic sectors. Some governments, including the UK, have announced the introduction of mandatory TCFD-aligned disclosure in the coming years. Although the momentum of mainstreaming climate-related risks into business activities is certainly clear, how to use scenario analysis to assess climate risks to the economy– particularly at industry level–remains largely underexplored. This project will offer one of the first in-depth sectoral-level climate scenario analyses that encompasses both transition and physical sources of climate risks. By examining climate-related risks in the hard-to-abate aviation sector, the goal of this project is not only to support more efficient capital-allocation decisions for airports and airlines, but also to inform policy makers on key policy interventions. Policy interventions could help the aviation industry to fulfill net zero transition needs while simultaneously ensuring that the sector is sufficiently prepared for increasing climate adaptation challenges.
Collaborators and funding
This work is supported by a philanthropic gift from Heathrow.
