UK aerospace and defence firms must fundamentally rethink what they do and how they do it if they are to successfully navigate increasing Environmental, Social and Governance (ESG) challenges.
That’s the warning from a new paper from Strategy&, PwC’s strategy consulting business. The report – ESG: A chance to rethink strategy – puts a spotlight on diversity and sustainable/ethical supply chains as two of the biggest hurdles to be overcome across the sector, with net zero noted as potentially the biggest challenge due to the scale of change required combined with the lack of commercially viable solutions to technical challenges.
With the UK Government positioning itself as a global leader on climate change and COP26 taking place in Glasgow in November, the report stresses the important role it plays in driving change across the aerospace and defence sector. The MOD, for example, produces over half of the UK Government’s Greenhouse Gas (GHG) emissions while aviation accounts for two-thirds of the MOD’s fuel consumption.
“Tremendous opportunity” to be a driving force
Diane Shaw, EMEA aerospace, defence and security lead at Strategy& said: “UK Government has a tremendous opportunity to be a driving force for innovation and changing behaviours across both defence and civil aviation sectors not only at home, but globally. After all, our defence sector exists to protect our people and promote prosperity and as our report shows, this can only be achieved with a clear focus on all aspects of ESG. Without that, the sector is failing in its purpose.”
“Those public and private organisations that take a lead in ESG, and closely align decisions to Net Zero ambitions, will position themselves as market drivers, perform better than competitors, and create new value for stakeholders.”
The report aims to bridge the gap between high-level ESG thinking and more technical guidance, giving organisations a framework to think through and put in place business initiatives to address ESG.
Growth opportunities are identified across three key areas:
Net zero – when it comes to tackling the ‘E’ in ESG, simply making minor adjustments towards a low carbon future will no longer cut it. It’s critical that organisations not only better understand current GHG emissions but go on to forecast how that will look in the future, setting aspirational targets and pulling on the levers they need to achieve the target.Enabling zero carbon aviation across civil and military aviation is a significant challenge. While research continues in developing and maturing synthetic fuels that deliver 25 per cent – 100 per cent missions reductions, for example, adoption is limited by cost, availability and supporting infrastructure. Cross-industry collaboration and focused R&D will be vital in delivering affordable and effective solutions across the industry and securing the sectors’ long-term survival. Those organisations that can bring more sustainable offerings to the market will have an advantage in their recovery.
Diversity – historically, the sector has failed to attract a diverse workforce although gender has been under the spotlight with charters, such as Women in Defence and Women in Aviation & Aerospace. The report argues that diversity must be expanded to include other under-represented groups, particularly related to ethnicity and disability, and promote fairness. But with more than 20 per cent of respondents in a 2020 PwC Aerospace and Defence Innovation Survey revealing no plans to introduce a Diversity & Inclusion strategy, change doesn’t seem imminent. Leaders must show they are genuinely committed to putting diversity high up the business agenda, linking it to executive remuneration or monitoring diversity with the same rigour as financial metrics, for example.
Sustainable/ethical supply chains – the environmental impact along supply chains must be seen as an opportunity to reinforce purpose rather than only placing stricter requirements on suppliers. However, the global nature of supply chains makes it difficult to hold suppliers to account, for example, where labour is used in countries with few employee protection laws. The use of rare-earth metals in applications such as satellite communications and missile guidance systems not only creates risks of exploitation and forced labour in mining operations but can damage the environment through its method of extraction. Organisations must strive for full transparency to protect the people at risk, and their own business reputation. This includes taking a risk-based approach, concentrating on the areas of the supply chain where there is the greatest risk of unsustainable or unethical practices, with those countries that score highly on the Corruption Perception Index an areas of focus.
“Seismic shift” on ESG objectives
Lynne Baber, defence and public sector social value lead at PwC, said: “The seismic shift in the objectives and mindset on ESG and the social value agenda we have started to see will ensure the Government and its suppliers don’t just deliver value-for-money for the taxpayer. This commitment will also drive wider benefits for society, the economy and the environment at the same time. The Government, including departments such as the MOD, are increasingly placing greater expectations on suppliers to comply with higher sustainability requirements as part of the procurement process. We need to challenge ourselves not just on how we minimise our impact on the environment, but how the solutions we design have a positive environmental impact and reach Net Zero targets.”