The Family Office Carbon Challenge
Seizing opportunities in the compliance carbon market to balance growing ESG importance and increasing global mobility of family businesses and affluent families.
- by Kerri Moss (Impetus Carbon) and Tobias Heining (Martyn Fiddler Aviation)
The primary objective of family offices still is to preserve and grow the family's wealth over generations. But achieving consistent returns and managing risk in a complex investment landscape can be challenging enough, as family offices often deal with intricate family dynamics, including conflicts and differing financial goals among family branches and even individual members. Currently, family offices are facing the challenge of having to balance two contradicting trends in affluent families’ matters: Increasing global mobility and the growing importance of ESG factors for their clients’ business activities.
As families and investments become increasingly global, managing assets and dealing with regulatory and tax implications across different countries can be complex. We already discussed the benefits and challenges of global mobility for family businesses and affluent families in more detail in one of our previous newsletters: Room For Manoeuvre – Family Offices Managing Global Mobility.
Nowadays, younger generations of affluent families are demanding for an even more purpose-driven approach to the handling of family investments, businesses and affairs. To avoid a clash of generations and philosophies, establishing a clear governance and open communication channels within the family, as well as between the family parts and their family office, is paramount, particularly in larger and more complex family structures, ensuring that all family members' and generations’ interests are represented.
When family members engage in traditional philanthropic activities during their global travels, they can ensure that their charitable giving aligns with their investment goals. This coordinated approach can maximise the effectiveness of their philanthropic efforts. However, there's a growing emphasis on ESG factors in investment philosophies and decisions beyond the mere philanthropic approach. Family offices need to incorporate ESG considerations into their investment strategies and report on their sustainability efforts. Some family offices may choose to embrace impact investing, which involves making investments with the intention of generating positive social or environmental impact alongside financial returns.
However, increasing global mobility of affluent families also has an effect on the carbon footprint with business aircraft as essential assets to ensure the mobility of family members regardless of where they actually live. Family offices and their clients are well aware of this ambiguity and potentially conflicting objectives. To address this, family offices may partner with organisations that offer carbon reduction programs specifically tailored to the travel industry. These programs can provide guidance on emissions reduction strategies.
In addition, it is possible to allocate a portion of travel budgets to support environmental conservation efforts in the regions visited which can include donations to local environmental organisations or participation in conservation projects such as reforestation, renewable energy, or methane capture initiatives. Implementing a system for tracking and reporting carbon emissions associated with travel can also be a means to help family offices and affluent families set emission reduction targets and make informed decisions about their travel choices.
Beyond the investment in carbon offset projects to compensate for the emissions associated with indispensable business travel, owners, operators and users of business aircraft may also consider using more fuel-efficient and eco-friendly aircraft. This can either be done by frequently investing into state-of-the-art-technology aircraft or by using more technically advanced and efficient charter machines. Many business aviation companies already offer options with lower emissions per passenger mile.
Nonetheless, at the moment production and availability of sustainable aviation fuel (SAF) are limited compared to conventional jet fuels as SAF production facilities are still relatively scarce, and there is a need for greater investment in production capacity to meet demand. Also, the infrastructure for storing and distributing SAF at airports and fixed base operators (FBOs) needs to be further developed or upgraded to accommodate SAF. In addition, as aviation is highly regulated, SAF must meet specific quality and safety standards. Certification processes can be lengthy and complex, which can slow down the adoption of SAF in business aviation. As a consequence, a broader availability of SAF at airports may be limited, and business aviation operators, as well as regional airports may not have the option to choose SAF even if they are willing to pay for it.
This leaves owners and users of business aircraft with a more virtual but nonetheless established approach to SAF: For every gallon or litre of certified SAF produced, a corresponding number of certificates is issued. These certificates represent the environmental attributes and sustainability benefits associated with that specific batch of SAF. The mechanism allows to support the production and use of SAF without physically receiving or using it in actual operations to change the fuel mix by purchasing SAF certificates equal to the amount of conventional jet fuel consumed. By purchasing SAF certificates, business aircraft owners and users can effectively offset a portion of their carbon emissions with environmental benefits represented by the certificates equivalent to the emission reductions achieved through the production and use of SAF. The revenue generated from the sale of SAF certificates helps incentivise the production and growth of sustainable aviation fuels and supports further investment in the development and commercialisation of SAF technologies.
Furthermore, the EU ETS, one of the world's largest and most well-established cap-and-trade programs designed to regulate carbon emissions within the EU, holds yet more challenges but also opportunities for family offices and affluent families. The primary objective of the EU ETS is to reduce carbon dioxide (CO2) and other greenhouse gas emissions by putting a price on carbon emissions incentivising businesses to reduce their emissions and transition towards cleaner, more sustainable technologies and practices. Aviation in general and business aviation more specifically is one of the sectors covered by EU ETS. From all compliance carbon markets worldwide, the EU ETS (linked with Switzerland) has the highest price of all systems (EUR 90 per ton) and covers the largest amount of aviation emissions while on the other hand offers the lowest share of free allowances with policy ambitions to increase the burden on aircraft owners and users. The current phase of EU ETS features even more stringent emissions reduction targets until 2030 and further adjustments to the allocation and trading rules.
The EU ETS covers all flights within the EU and the European Economic Association (EEA) and imposes the need to buy EU Allowances (EUAs) as climate or carbon credits for each ton of CO2 emitted. Under the cap-and-trade system, a specific number of these emission allowances are created and distributed to participating companies. Each EUA represents the right to emit one ton of CO2 or an equivalent amount of other greenhouse gases. Companies can buy, sell, or trade EUAs on the carbon market. If a company reduces its emissions below its allocated allowances, it can sell the surplus EUAs to other companies that need them. Conversely, if a company exceeds its allocated allowances, it must purchase additional EUAs to cover its excess emissions. With all sectors receiving less free EUAs in the years to come, going forward, business jet owners will face not only a phase out of free allowances but rather an end to the issuing of free EUAs in 2026 already.
Furthermore, EU Council and Parliament agreed on a phase-in plan to price imported goods based on their embedded emissions. Starting in 2026, importers of cement, aluminium, fertilisers, electricity, hydrogen, iron and steel along with some precursors and downstream products will be required to surrender newly created certificates equivalent to the embedded emissions of their products. And the EU is most likely to expand the logic of “embedded emissions” to further sectors in the future with potential implications for business aircraft operational cost, especially with regards to fuel.
By participating in the EU ETS, family offices overseeing the financial affairs of affluent families can hedge against regulatory and financial risks associated with carbon emissions deriving from owning or using business aircraft. By holding EUAs or engaging in emissions trading they can protect these assets from potential penalties or regulatory changes, as well as cushion residual value decline. Also, EUAs as tradable assets are subject to fluctuating prices already are being forecasted to reach over EUR 400 per ton by 2040. Family offices that strategically buy and sell these allowances can generate returns if they anticipate market movements effectively. In addition, they may seek support from the aviation finance industry for further innovative EUA financing solutions.
In 2023, the aviation finance community already started to focus on EUA investment solutions. Thanks to the EU ETS, the EU Innovation fund has pledged more than EUR 4 bn to the transition towards a more sustainable future for aviation. This includes investment in SAF as well as electric and hydrogen propulsion technologies.
How it plays out: A lessor has invested EUR 100 mn into EUAs. This was an investment, not a cost. Voluntary carbon market credits are a cost, not an investment. It is worth reading those two sentences again as there is a lot of discussion in the market about the two elements and they are often misunderstood and mixed up. The EUA investment acts as a residual value risk hedge for their aircraft portfolio. The price of carbon goes up, operational costs go up for the aircraft yet the lessor now has a security blanket with the EUA investment. Although the discussion of residual value risk with carbon as a factor can be equated to the ‘elephant in the room’, it is something that needs to be addressed sooner rather than later by owners and users of business aircraft.
An essential element to recognise at this point is that the investment has an environmental kicker. The lessor is able to address the increasingly intense demand to their shareholders to make sustainable choices. For instance, SparkChange is the first physically-backed carbon EUA product offered on the public exchange, and by buying a physical allowance – not a derivative of an allowance – investors prevent pollution in three ways. The investment amplifies environmental impact and the assets are recognised as a valid way to achieve global net zero emissions targets.
After 5 to 7 years, the lessor then re-sells the EUAs when they part with their current aircraft portfolio to upgrade to more environmentally friendly aircraft. The EU ETS carbon market has more liquidity in a day than the current Voluntary Carbon Market (VCM) does in a year. Carbon offsets remain in the firing line in terms of quality and integrity and jeopardise the reputation of air travel as a whole. Therefore, investing in the EU ETS regulated market is a smart, future-forward way for family offices of addressing residual value risk and environmental goals as more and more affluent families and family-run businesses will establish clear guidelines for the stewardship of their wealth that include ESG principles. This can also involve setting up a family constitution or mission statement that outlines the family's commitment to responsible and sustainable investing.
Finally, engaging with carbon markets and emissions reduction initiatives can provide family offices with access to experts in environmental finance, carbon trading, and sustainable investment strategies, enhancing their overall investment capabilities to further benefit their clients. As family offices focus on preserving and growing wealth for future generations, addressing climate change through investments in the EU ETS can contribute to a more sustainable future, ensuring the preservation of assets and opportunities for future family members.
The information included in this article is considered true and correct at the date of publication; changes to rules and regulation made after the time of publication may impact on the accuracy of the information referenced or inferred to in this article. The information in the article may change without notice and Martyn Fiddler Aviation is in no way liable for the accuracy of any information printed or stored or in any way interpreted and used by the user. This article or the information contained in it is not provided or intended to be used as advice of any form.
If you have any doubts or would like to discuss any aspect of this article, please do not hesitate to contact one of our experts who will be happy to discuss your individual circumstance.