Session 3

Environmental, Social, and Governance Reporting and Airports

Speakers

Katherine Preston, Director, Aviation Environment and Sustainability, HMMH, Moderator

Jill Blickstein, Vice President Sustainability, American Airlines

Chris Poinsatte, Chief Financial Officer, Dallas Fort Worth International Airport

Kurt Forsgren, Managing Director, Transportation Sector, S&P Global Ratings

Chris Bergstrom, Executive Director, UBS Financial Services Inc.

Overview

For many years, airports have undertaken sustainability initiatives to minimize their impact on natural resources, increase operational efficiency, ensure their economic health, and address social responsibility. Many airports have also documented their efforts in voluntary sustainability reports or on their websites. However, there have been few requirements and little standardization as to what information airports should report and how the information should be shared. This is changing as ESG reporting championed by investors for publicly traded companies is beginning to affect U.S. airports. This session discussed ESG reporting trends, emerging requirements and frameworks, who is asking airports for information, what they are seeking and how it is being used, stakeholder expectations, reporting risks, and what airports should be thinking about now to prepare.

Detailed Summary of the Panel Discussion

Katherine Preston welcomed the panel and explained that the originally scheduled moderator, Dave Bannard (Kaplan Kirsch & Rockwell LLP), was unable to attend. Preston then defined ESG reporting and described the political landscape that is related to the concept, including recent political pushback in certain states. Preston described how companies use ESG frameworks to report how they identify and manage risks. She noted that while publicly traded companies have been providing this information in ESG reports for several years, airports are now also starting to be asked for this type of report by bond rating agencies and other stakeholders. Preston stated that, although many airports have developed sustainability plans and published sustainability reports for years, and although these types of documents are helpful and related to ESG reports, they are not necessarily the same thing. Preston explained that the panel would discuss these issues, what is important for airports to know about ESG reporting, what is coming on the regulatory front, and what airport partners are doing regarding ESG reporting. She then briefly introduced each panel member before moving into the moderated discussion.

Preston asked the panelists what they thought the market was asking for in terms of data from airports and how that had changed over the past several years.

Jill Blickstein said that 10 years ago, she could put any type of information in an ESG report because there were no common or industry-accepted frameworks. Now, Blickstein explained, companies are expected and required to report what stakeholders want them to report. Blickstein recommended that audience members read BlackRock CEO Larry Fink’s annual letter, which discusses trends in ESG reporting. Blickstein said she gets questions every day from investors and stakeholders about American Airline’s ESG report.

Chris Poinsatte related that Dallas Fort Worth International Airport (DFW) wanted to seek investors in Europe and, in order to do so, had to publish an ESG report. Last year, the finance department was more involved in developing and reviewing the airport’s ESG report, since it is now being used as tool by investors, whereas before, it was used primarily as a marketing and communications tool.

Kurt Forsgren said that reporting trends are being driven by investors. Investors see this as another way to measure and manage risk. He explained that ESG reporting is a way for investors to look at the risks. Reporting entities need to narrow down the ocean of possible risks and give investors the best information with which to make decisions. Forsgren noted that a new term for this is “investor-grade report.”

Chris Bergstrom talked about risks that entities do not typically think about—for example, the pandemic and climate-related risks. Bergstrom stated that investors are trying to get their arms around those risks in a meaningful way. He explained that investors want to see the inside-out disclosures (i.e., what the reporting entity is doing that affects the world) as well as the outside risks that could affect the reporting entity. He noted that investors’ interest in this type of reporting and information is not going away and is important to the new generation of investors.

Preston noted that ESG reporting is a relatively new field for airports. She asked Poinsatte what the industry is doing to help airports distinguish between frameworks and requirements and to develop guidance.

Poinsatte discussed a recent effort by Airports Council International—North America (ACI-NA) to develop an ESG task group encompassing a range of airport practitioners, including attorneys, financial professionals, experts in sustainability subject matter, and consultants. The task group’s goal is to come up with guidance for a set of standard ESG metrics and definitions for the airport industry. Poinsatte also noted that the Global Reporting Initiative and the International Sustainability Standards Board are in the process of updating their frameworks as well.

Blickstein noted that the utility industry did something similar through the trade association Edison Electric Institute. The utilities were in the same position as airports, with many different ESG reporting frameworks to choose from and no standard set of

metrics for their industry, and they collaborated through the Edison Electric Institute to develop guidance and a common framework.

Preston asked the panel how airport and airline efforts help each other and foster collaboration when it comes to ESG reporting.

Poinsatte agreed that airlines are key stakeholders that the ACI-NA ESG task group will talk to in order to understand what information the airlines will need from airports and what information the airlines can share with airports.

Blickstein noted that the industry should share information because airport practitioners want to learn from each other. She also explained that there is a push from stakeholders to include more information about the supply chain, such as Scope 3 GHG emissions, in their ESG reports. In order to inventory and report on Scope 3 emissions, entities have to talk to each other. It is designed for that purpose. Calculating Scope 3 emissions is difficult, and there is no universally accepted approach. Blickstein stated that ESG reporting would increase collaboration.

Addressing Forsgren, Preston noted that S&P looks at ESG as a way to evaluate risk. She asked him what data S&P looks at and how that helps evaluate the risk.

Forsgren stated that his organization looks at things that affect financial performance, regulatory compliance, demand, and how those things come together. He also noted that topics important to stakeholders, such as recycling, are something S&P looks for.

Next, Preston asked the panel about social- and governance-related items that are material to the airport industry and its investors.

Bergstrom noted that the social and governance (the “S” and “G” of ESG) risks are much higher when there are conglomerates running several businesses and regimes across the globe. He explained that that is not the operating environment of U.S. airports, so there is less social- and governance-related risk for the aviation industry; rather, there is more focus on the airports’ operations. In terms of airports’ impact on the external world, most of the risks are environmental, and that is why the “E” in ESG is more of a focus for U.S. airports.

Preston asked the panel who is responsible for the reporting and who has the data within airports and airlines.

Poinsatte restated that, in the past, the marketing department compiled DFW’s ESG report but, more recently, DFW has formed an executive group for the ESG report with representatives from multiple departments. This process has gone well at DFW, as everyone understands the need for more collaboration.

Blickstein noted that getting internal stakeholders to read ESG reports used to be challenging. More recently, however, she sends the report to many internal stakeholders to review and ensure the accuracy of the data being reported. Blickstein stated that American Airline’s investors are interested more in the risks related to

climate change than in recycling plastics on board, for example, though both are important. Blickstein then said that data related to social risks are gathered from across the company, whereas the legal department tends to focus on governance-related risks.

Bergstrom noted that an interdisciplinary approach is very important to successful reporting—for example, because other groups are doing things that are not always on the finance team’s radar or because one department at the airport may have data that the reporting department does not know about.

Forsgren added that people sometimes operate in silos, so without collaboration, there could be discrepancies in the report.

Blickstein agreed and commented that ESG data historically have not gotten the same amount of rigorous oversight as financial reports, but that American Airlines is doing rigorous oversight. Recently, the company had an audit team review the draft ESG report, and it found some items that needed to be updated or corrected.

Preston then opened the panel to questions from the audience.

Steve Van Beek asked the panel how airports should approach reporting with multiple different frameworks.

Poinsatte pointed out that the goal of the ACI-NA ESG task group is not to develop benchmarks or strict requirements for the airport industry, but rather to develop guidance to help airports get started with reporting to and communicating with the rating agencies.

Forsgren agreed that any reporting guidance is not one size fits all. A reporting entity should consider what investors want to know when it is identifying risks and management approaches, and standards are evolving.

An audience member asked about the importance of the ”S” in ESG.

Forsgren stated that he does not think it is as important as the other factors for airports in the United States, though it has taken on a greater importance because of the pandemic. He thinks of the “S” as including the workforce, health, and safety. Communities are critical stakeholders for social risks.

Bergstrom agreed that there are not as many external social risks for airports, but it depends on what investors find important.

Poinsatte added that it is not that investors are not interested in the social and governance elements of ESG for airports, but that there is no consistency to reports yet.

An audience member asked whether the panelists see a clear link between having a reporting strategy and results.

Poinsatte agreed that it is very important that the reporting reflect the airport’s strategy. Sustainability plans are a way to manage ESG risks. He noted that airports ought to discuss progress in governance and environmental aspects in sustainability plans.

Blickstein shared that American Airlines has a science-based target carbon emissions reduction goal, and in its ESG report, there is a wedge chart showing how the company plans to meet that goal using the resources available.

In response to an audience comment that the content of ESG reports may change over time, Bergstrom agreed that, often, the first ESG report an organization develops just shows what was done in the past year and can be simple. However, reports become more complex over time as organizations gather more data and refine their list of metrics for reporting. He noted that reporting is an evolutionary process and does not happen overnight.

An audience member asked the panelists to address governance topics further, specifically, what should be incorporated by airports.

Forsgren stated that the primary focus on the “G” in ESG is risk management: identifying all current risks and how to mitigate them. He said the other focus is on operational efficiency: determining whether risk management techniques that support long-term financial stability are being implemented and whether a pathway is being made to support goals such as carbon removal.

Poinsatte said that airports should spend more time on risk management and ensure that reporting is timely, accurate, and consistent across different reports.

Forsgren raised the issue of cyber risks and the importance for airports to be prepared for ongoing cyber challenges and clarified that it is a governance issue. Poinsatte pointed out that airports need to be careful in what they disclose about cyber risks, so as not to release sensitive information publicly. Blickstein agreed with Poinsatte on the need for caution regarding the disclosure of cyber risks.

An audience member asked the panelists how they bridge the gap between, on the one hand, what investors and stakeholders are asking in terms of managing and addressing climate risks and available resources and, on the other hand, the political headwinds—that is, the backlash to ESG reporting from certain political figures.

Blickstein noted that her company is not able to fully decarbonize at this time. American Airlines is making strategic investments to make progress for the future, such as executing contracts for SAF and helping SAF producers find financing so that the fuel will be more readily available and cost competitive in the future.

Poinsatte stated that how an entity manages and mitigates the headwinds is important to include in an ESG report.

Preston listed the states that currently have rules to oppose or limit ESG reporting in place or pending. She asked the panelists if the political pushback was affecting their organizations.

Blickstein stated that, because of investors’ interests, the anti-ESG movement had not yet affected American Airlines’ ESG reporting. The company wants to know what is important to investors and respond to that. She stated American Airlines is transparent about those things; for example, the airline cannot completely decarbonize yet, but it has a plan to address carbon emissions and other climate risks to the company. Blickstein further noted that other reporting frameworks, such as climate-related financial disclosure, are important for companies in hard-to-abate sectors (i.e., those that are difficult to decarbonize) such as aviation. She noted that investors want to know whether the company has identified and understands its risks and has identified a pathway to address those risks. She did note that, while American Airlines has not felt impacts from the anti-ESG movement, many financial institutions have been affected by state laws addressing ESG reporting, such as those in Texas and Florida.

Bergstrom noted that airports have governance structures that facilitate input from the community on how they act.

Poinsatte explained that DFW has been on a sustainability journey for 20 years and has saved tens of millions of dollars from those actions. Sustainability initiatives have made financial sense for DFW and have been good for the company and the community. As a result, Poinsatte said, the airport has never been shy about talking about things it has done. He noted it is unfortunate when restrictions are put in place on who the airport can do business with because of anti-ESG sentiments at the state level.

An audience member asked Forsgren how much airports should focus on ESG reports in bond presentations. Forsgren replied that it is important. Airports should focus on risks with financial materiality and how that is being managed.

Preston thanked the panelists and asked them for their final takeaways on this topic.

Blickstein said that from an airline perspective, it is important for airports to understand the risk posed to operations by climate change, as it has huge implications for the airports and airlines.

Poinsatte emphasized that airport executives and chief financial officers need to be involved in ESG reporting. Airports should just start with a basic report, including metrics, and ensure that the data are accurate.

Forsgren said that airports should be focused on credit risks, which are material to the financial performance of the airport.

Bergstrom noted that it is not the destination but, rather, the journey. Airports should accept that change will happen and take the first step.