Helping airports create an integrated approach to ESG

Airports understand that their permission to grow and operate relies on their commitment to sustainability and the efforts they make to reduce, eradicate or mitigate the impact of their operations on the environment and communities they serve.

But this goes far beyond simply being a so-called ‘good neighbor’ as stakeholders now expect a genuine and comprehensive approach to environmental, social and governance (ESG) issues.

The increase in the number natural disasters stemming from climate change, increased focus on pay equity, the Paris Agreement on Climate Change, and the increasing focus on workplace issues have led to increased scrutiny, regulation, and market initiatives to address systemic gaps in identifying and managing key ESG risks. Add to this the unprecedented economic and health crisis we are currently experiencing as a result of COVID-19, and it is clear the cost of inaction on ESG matters is now too high.

For airports, the risk of losing a social license to operate and grow, experiencing employee retention problems in a constrained job market or losing access to capital and non-compliance with incoming regulation, can be mitigated through a robust ESG approach that’s linked to the airport’s business strategy.

At the ACI Asia-Pacific Airport Economic Economics Committee meeting earlier this month, FTI Consulting shared its White Paper which sheds lights on the impact of ESG on airports and highlights some of the key pitfalls in implementing a practical and meaningful ESG strategy relevant to the airport. 

Avoiding the seven ‘sins’ of ESG mismanagement

Over the last 25 years, the airport business model has changed fundamentally across much of the world with growing private investment and ownership in airports and an increasingly competitive market. Airports are now mature, sophisticated businesses that are important economic engines, and changes in their ownership and management models have resulted in a greater focus on corporate social responsibility, environment and sustainability issues.

As airports seek to attract greater levels of investment, they may be wary of ESG-related practices that may lead to missed opportunities. At best, this can result in failure to receive credit for their efforts but, at worst, it can leave the company exposed to significant risks.

FTI Consulting’s White Paper outlined the following misconceptions and practices – the ‘seven sins’ – which can lead to significant pitfalls in an airport’s ESG journey.

1. Excessive focus on ratings: an approach that focuses exclusively on improving the company’s rating is at risk of allocating more resources to ‘ticking boxes’ instead of developing a strategy that is tailored to the company’s unique outlook and exposure to risk. Positive ratings can indeed help a company gain recognition, but they should be viewed as only the outcome of the company’s efforts.

• Treating ESG solely as a communications effort: communication is a critical tool to help an airport amplify its messaging and airports now communicate with customers and communities with greater sophistication. Communications efforts cannot substitute for a robust management system that addresses material risks, however. Investors and other stakeholders can see through messaging that does not correspond to significant action – often referred to as ‘greenwashing’.

• Lack of board and management oversight: some companies delegate ESG or sustainability responsibilities to individuals or departments within the firm, without involving the board and senior management. It is imperative that the board and senior management not only oversee but also champion the company’s ESG strategy, bringing it to full alignment with the broader business strategy.

• Disconnect from business strategy: an ESG strategy cannot be thought of separately from the airport’s business strategy. Such disconnects may stem from potential misperceptions about the purpose of the ESG program, lack of board and management oversight, or a failure to conduct a thorough materiality assessment.

• Compliance-only approach: to position themselves as leaders, airports need to proactively demonstrate best-in-class programs that go beyond simple compliance. They should exceed minimum requirements as part of a deliberate ESG strategy and fully explain their practices to get full credit for their efforts.

• Inconsistencies across the firm: failure to adopt an airport-wide strategy and achieve coordination across the business can lead to the inconsistent adoption of standards. This risk is especially prescient in an organization with different business units. Airports are particularly susceptible to this and should seek to map their policies and programs across business units to facilitate the harmonization of ESG efforts across the airport community. Fostering a consistent approach with equivalent practices on how to address material risks across airport partners is a crucial step.

• Lack of assessment and monitoring: a lack of effective monitoring of ESG performance impedes an airport’s ability to make progress and receive full credit for its ongoing initiatives through reporting. In addition to a review of data, the monitoring process should include continued assessment of the effectiveness of the company’s programs, so that systems can be adjusted to achieve continuous improvements.

While these ‘sins’ may not necessarily qualify as deadly, they can prove dangerous if they lead to poorly managed or superficial approaches to risk management. Airports already gather data on environmental impact, community and stakeholder engagement, and their approach to workforce and governance, but transforming this into an integrated ESG approach is challenging.

ACI also developed a first of its kind guidance for airports on ESG Management Best Practice to define the differences between ESG and sustainability reporting, and why ESG matters to investors. The document also provides a sense of how airports are currently reporting, and how they can adopt a framework.

ESG Management Best Practice

Read it now

ESG is here to stay

As public opinion becomes more sensitive to social and environmental issues and more receptive to scrutiny, companies, investors, and other market participants are likely to become increasingly aware of the potential financial and reputational impacts of ESG management.

This is particularly important for airports as they fight to get back on the path to long-term growth and meet the returning passenger demand. Airports Council International (ACI) World predicts global traffic will return to pre-pandemic levels by 2024 or 2025 and back on the path to long term growth which will result in a doubling of global passenger numbers within the next two decades.

As airports plan to meet this surging demand and make decisions on investment in people and infrastructure that this will require, there has never been a better time for a more proactive approach to monitoring and managing ESG risks.

Having advised some of the world leading corporations, private equity firms and private equity portfolio companies on their ESG journey, FTI Consulting regular shared insights on ESG issues that matter.

The views expressed herein are those of the author(s) and not necessarily the views of FTI Consulting, Inc., its management, its subsidiaries, its affiliates, or its other professionals.