ESG (Environmental, Social, and Governance) in Aerospace and Defense – Thematic Research

There is a growing focus on aerospace & defense companies adapting to and managing their environmental, social, and governance (ESG) risks. Challenges such as climate change and human rights concerns are receiving increasing global attention. Due to air travel carbon emissions, the aerospace & defense industry, in particular, has been under intense scrutiny. Aircraft engines are now responsible for up to 2% of the world’s carbon output, and aerospace & defense primes will continue to use more sustainable technology and create fewer carbon emissions. Although environmental sustainability in defense might be expected to be relevant only to industry rather than the end-user, it is becoming increasingly important for modern militaries to also adopt sustainability strategies.

What are the main trends shaping the ESG theme in the aerospace & defense sector?

Technology trends

A new generation of SAF is being made from recycled materials like cooking oil or biowaste. In comparison to fossil fuels, they can reduce CO2 emissions by 80%. Forestry or agricultural wastes and residues are part of SAF production alongside municipal solid wastes (MSW) or algae. Technologies (such as electro-fuels) based on carbon from waste gases or direct air capture combined with hydrogen obtained from renewable energy are other SAF potentials.

Advancements in lightweight composite materials will enable designers to dramatically reduce the weight of airframes, from large commercial airliners to lightweight high altitude platform systems (HAPS). This will enhance and accelerate the proliferation of electric aircraft by reducing the energy density burden for batteries. Airframes will be lighter, so less power will need to be stored onboard to provide lift.

Batteries are a component of electric aircraft technology, has been the limiting factor since the notion of electrically propelled aircraft was first proposed. Previously, batteries were not energy-dense enough to allow for use in flight. The amount of energy stored within fuel was far greater than that stored in the same weight of batteries, limiting the range of electric flights. However, recent developments propelled increasing battery energy density, enabling meaningful electrically powered flights to take place. Additionally, battery technology will likely continue to improve as several industries, such as the automotive industry, shift to offer more environmentally friendly alternatives.

Macroeconomic trends

The International Air Transport Association (IATA) estimates that global passenger demand for 2020 fell by approximately 66% compared to 2019, due to the COVID-19 crisis. Travel restrictions and border closures have led to a decline in air travel, and it is unlikely that demand will recover quickly. In addition, the cost of parking and maintaining their fleets is hitting airlines at a moment when many cannot afford it. This is driving some to shed sections of their fleets that are expensive to maintain and unlikely to be profitable for the foreseeable future, such as wide-body aircraft. It could be argued that the COVID-19 crisis is presenting airlines with the opportunity to adapt their fleets to future demands. It could be an opportune moment for the inclusion of electric aircraft within their fleets.

Defense offsets are arrangements in which the purchasing government of the importing country obliges the supplying company of the exporting country to reinvest some proportion of the contract in the importing country. This can be done through defense-related projects (for example, by sub-contracting) or a defense-unrelated enterprise such as purchases of goods or services. There is almost no due diligence on potential improper beneficiaries from the offsets in many countries, often by design. Nor is there monitoring of performance on offset contracts, audits of what was delivered compared to the pledges, or publication of offset results, benefits, or performance. This makes offsets an ideal playground for corruption.

As the COVID-19 pandemic has progressed, there has been widening discussion regarding a Green Restart. Arguably, the current crisis has focused minds upon the impacts of the looming climate crisis, which would likely have economic and political effects even more grave than those the global community is currently experiencing. There has, therefore, been discussion that the restarting of the global economy following the COVID-19 pandemic should be an opportunity to develop a proactively green global economy.

What are the ESG challenges in the aerospace & defense sector?

Environmental challenges

The environmental impact of aviation is becoming more pronounced, with aircraft engines now responsible for up to 2% of the world’s carbon output, a figure that is rising at pace. Current aircraft are largely reliant on kerosene, a fossil fuel. Air travel is the most carbon-intensive form of travel due to the amount of energy used when airborne. Aircraft engines emit a mixture of environmentally damaging gases, with carbon dioxide (CO2), nitrogen oxides, and water vapor among the most relevant when considering effects on the global atmosphere. Climate change is also a significant challenge within the defense industry. Although environmental sustainability in defense might be expected to be relevant only to industry rather than the end-user, this is increasingly not the case. Many modern militaries now have sustainability strategies.

Aircraft use an incredible amount of fuel. For example, a Boeing 747-400 jumbo jet carries 63,000 gallons of jet fuel and burns through it at a rate of 4 liters (0.9 gallons) per second. If global warming is to be halted and if the targets on carbon emissions set out in the Paris Agreement on climate change are to be achieved, aviation will need to significantly reduce its fossil fuel consumption in the long term. Technologies such as hydrogen-powered aircraft are being developed, but the expected timeline for the global integration of such technologies is more than 15 years. Action needs to be taken now to curb the aerospace industry’s impact on the climate in the short term.

Social challenges

In terms of social sustainability, following supply chain shocks during the COVID-19 crisis, defense primes and militaries will want to have increased visibility and control over supply chains. Every year, aerospace and defense primes supply large volumes of military equipment to some of the world’s most violent and unstable areas. This equipment is often used unlawfully in the context of armed conflicts and in political unrest marred by serious violations of international human rights and humanitarian law.

Aerospace and defense manufacturing is expensive, complex, and demands vast amounts of skilled human labor. Supplier factories can be staffed by hundreds or thousands of individuals making parts for platforms which are then assembled at other facilities operated by primes. Defense spending, which includes procurement, accounts for a large portion of many countries’ overall budgets. For example, the US Department of Defense (DoD) budget for 2021 is $716.2 bn, with $243.9 bn allocated for acquisition (procurement and research and development). As a result, the defense industrial base, particularly in the US, forms a significant part of local, regional, and national economies. For areas reliant on business from the DoD, the failure to secure contracts can have significant ramifications for the local economy.

Governance challenges

Poor governance can carry a high cost. Many aerospace and defense companies have been tarred with this brush, suffering consequences ranging from fines to lengthy or permanent blocking. The defense industry is generally considered to be among the most susceptible to corrupt behavior across all industrial and commercial sectors. The high value, complexity, and secrecy of deals help to provide means, motive, and opportunity for parties to unjustly profit from arms deals or attempt to swing deals in their favor. 

Offsets are often a major source of corruption. Typically, open to little scrutiny due to commercial confidentiality, the investments and contracts resulting from offset packages can offer a major reward to businesses in the buyer country and their shareholders. This allows decision-makers to direct offsets toward items that will benefit themselves or their friends and family. While offsets occur in other areas of government procurement, they are most prominent in the defense industry.

Which are the leading companies focusing on ESG theme in aerospace & defense sector?

Airbus, BAE Systems, Boeing, L3Harris Technologies, Leidos, Lockheed Martin, Northrop Grumman, Raytheon, Rolls Royce, Safran, and SpaceX are the major companies focused on ESG in aerospace & defense sector.

Market report scope

This report provides an in-depth analysis of the following:

• This report focuses on the importance of ESG sustainability throughout the aerospace & defense industry.

• ESG thematic research offers a detailed analysis of the various sustainability factors that are of importance to stakeholders and why businesses throughout the value chain should focus on improving their ESG responsibility. The research includes insightful industry analysis of ESG factors and key use cases highlighting how defense primes and militaries are integrating sustainable initiatives.

Key Highlights

One of the main factors for technological advancement is to improve sustainability of both products and operations. Electric aircraft, hydrogen-powered aircraft and sustainable aviation fuels are key innovations that will shape the future of air travel. Improving social sustainability is vital for companies seeking to earn government contracts, increasing visibility and improving management throughout the whole supply chain will be vital. The defense industry is often susceptible to corruption and poor corporate governance can carry a high cost for companies both financially and regarding reputation.

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• Gain an in-depth understanding of how ESG factors are shaping the industry in the top spending countries across the world and identify the opportunities offered by each of them
• Strengthen your understanding of the market in terms of industry trends, challenges, and the latest technological developments, among others.