IFM Investors bets on sustainable aviation fuel, but headwinds loom
Australian superannuation funds are increasingly bullish on sustainable aviation fuel (SAF), with major players like AustralianSuper, Aware Super, and Cbus exploring significant investments in the sector.
This collective momentum signals a strong commitment to sustainable air travel and underscores Australia's potential to become a leader in SAF production.
"SAF will contribute to 65% of aviation decarbonisation between now and 2050," said Danny Elia, global head of infrastructure at IFM Investors.
IFM Investors, owned by 17 major Australian superannuation funds, is leading the charge in the SAF sector within Australia.
In a recent development, IFM Investors, along with GrainCorp and Ampol, signed a three-way Memorandum of Understanding to explore the establishment of an integrated renewable fuels industry in Australia.
This collaboration aims to assess the feasibility of a renewable fuels facility at Ampol's Lytton Refinery in Brisbane and to explore the supply of domestically sourced feedstocks.
IFM Investors
"As a major investor in airports, we have a significant interest in facilitating cleaner flying so we are proud to support this significant step in developing a SAF industry right here in Australia,” Elia told AsianInvestor.
“Our long-term investment approach is key to this emerging industry – we bring the scale, skill and dependability needed to support our partners, GrainCorp and Ampol, to kickstart a new industry that will create new jobs and economic opportunity," he said.
However, as these financial powerhouses pour capital into SAF infrastructure, questions linger about the feasibility and demand for this green alternative. Some industry analysts advise caution, highlighting challenges related to scaling production and achieving economic viability.
BOLD FLIGHT PLAN
IFM Investors sees SAF as a critical component of their sustainable infrastructure portfolio. In 2020, the firm set a goal of achieving net zero by 2050 for their Scope 1 and 2 emissions, with interim targets set for each asset through 2030, according to Elia.
"For airports, we've set goals to achieve net zero for Scope 1 and 2 emissions between 2025 and 2030, much earlier than our original 2050 target. We then shifted our focus to Scope 3 emissions in airports," he said.
"SAF is the most significant opportunity to decarbonise aviation," Elia said. "It's a drop-in fuel and the most cost-effective option, unlike alternatives such as hydrogen which require significant new infrastructure."
This strategic focus led to IFM's recent collaboration with GrainCorp and Ampol to explore establishing an integrated renewable fuels industry in Australia.
“For each litre of SAF used in place of conventional aviation fuel, you reduce emissions by 45% to 85%, depending on the feedstock mix,” said Elia.
Other Australian superannuation funds are also jumping on the SAF bandwagon, with several major players committing to investments in sustainable aviation initiatives.
This collective push is seen as a significant boost to the nascent industry, potentially accelerating the transition to greener air travel.
TURBULENCE ON THE HORIZON
Despite the optimism among Australian investors, a recent report from McKinsey and Company paints a grimmer picture. The report highlights several challenges that could impede the rapid adoption of SAF.
One of the most significant obstacles is the cost barrier.
"SAF currently costs around 3 times more than fossil fuel kerosene," reads the report.
This substantial price discrepancy represents a major hurdle for widespread adoption, particularly in an industry known for thin profit margins.
The report also forecasts potential supply shortages by 2030, flagging concerns about the industry's ability to meet the growing demand.
"SAF demand could outpace supply if mandated and targeted demand materialises, unless there is a significant increase in additional production volume," according to McKinsey.
This mismatch could lead to further price hikes and undermine the aviation industry's efforts to meet its decarbonisation goals.
Investor hesitancy is another issue addressed in the McKinsey report.
The research highlights a cautious stance among potential funders, stating, "Scaling SAF requires significant funding, from venture capital (VC) to infrastructure investment for building SAF facilities. Investors, however, are hesitant because of uncertainty around future demand and technology readiness."
COUNTER THRUST
Regardless of these concerns, IFM Investors and Elia remain optimistic about the prospects for SAF.
Elia argues that the challenges, some of which were identified by McKinsey, underscore the need for substantial investment at this juncture. He also stresses the importance of government support.
"There are three key areas where policy settings are needed: sustainability certification, usage mandates, and cost support," said Elia.
"We need clear definitions and certifications for sustainability to ensure product integrity and consumer confidence. Since SAF will initially cost more than conventional aviation fuel, there needs to be some form of mandated usage. The figure being discussed is between 5% to 10%," he said.
While IFM is actively working to reduce production costs, Elia acknowledges that supply-side support from government will be essential to lower the price of the end product for customers during the first 5-10 years.
“We're confident that both federal and state governments, particularly in Queensland and New South Wales, are working on policy measures heading in the right direction. Because of this confidence, we haven't slowed down our efforts,” said Elia.
SCALABILITY
Moreover, IFM is focusing on near-term, scalable technologies while investing in research for next-generation SAF production methods.
Hydroprocessed Esters and Fatty Acids (HEFA) is currently the most widely used and cost-effective technology for producing SAF, utilising vegetable or animal fats as feedstock.
“Over time, we believe other feedstocks will come to market. There are sugar-based fuel options for SAF, using carbohydrates like sugar, sorghum, and wheat. These aren't currently as cost-effective and don't have the best carbon intensity scores yet, but there's a lot of progress being made,” said Elia.
"We see about 10-15 years of focus on HEFA, with a gradual shift towards carbohydrate-based technologies like alcohol-to-jet in that timeframe."
The pursuit of SAF exemplifies the complexity of the global transition, according to Elia.
While there is considerable discussion about investing in renewables such as solar farms, wind and batteries — hard-to-abate sectors like transportation require more challenging work.
"We're diving deep into understanding the entire supply chain, from growing feedstocks to reducing the carbon footprint of the end product," he said.