ESG/sustainability in aerospace and defense

Let’s dispel a critical misconception right now: the old belief that maligned companies need not attempt to communicate their environmental, social, and governance (ESG) and sustainability policies and program successes with Wall Street because exclusionary sustainability investing is dominated by exclusion investors.

It’s time to take another look!

Changing times

In recent blog posts, I’ve written about sustainability having matured as a field to effectively become part of the mainstream lexicon for both investors and companies alike and its expanding significance in capital competition. I’ve also shared U.S. SIF regular tracking that confirms inclusionary sustainability investment strategies, with as much as $5.8 trillion AUM engaged in ESG integration, having overtaken exclusionary strategy.

To add to this:

• McKinsey & Company recently published its study on advancement in sustainability investing. It noted: “While early ethics-based approaches such as negative screening remain relevant today, other strategies have developed. These newer strategies typically put less emphasis on ethical concerns and are designed instead to achieve a conventional investment aim: maximizing risk-adjusted returns.”
• CFA Institute recently published results of its 2017 survey on sustainability investment practices which indicated that 73 percent of respondents take ESG into account in their investment analysis and decisions, and “Investment professionals worldwide also agree that ESG integration is the most effective strategy for using ESG factors.”

Another look at Aerospace and Defense

Aerospace and defense (A&D) are currently estimated to have a global sector market capitalization of $725 billion. It is a sector where sustainability programs and reports, related supply chain expectations, and operational efficiency practice improvements have become integrated into best practices. It is time to revisit opportunities to bridge these sustainability program successes into competitive capital market relationships.

The Dow Jones Sustainability Index (DJSI), launched in 1999, is arguably the most coveted sustainability investment index. DJSI relies on a best-in-class approach for selecting the most sustainable companies from each of the 59 assessed industries. As of the latest annual DJSI rebalancing, published in September 2017:

• Nearly a half-dozen A&D companies are included today in the DJSI – Embraer SA ($ERJ), Leonardo Spa ($LDO.IT) (formerly known as Finmeccanica), Lockheed Martin ($LMT), Northrop Grumman ($NOC), and Rockwell Collins ($COL)
• Two tobacco companies are also included in the index – British American Tobacco ($BAT) and Altria Group Inc (Philip Morris) ($MO).

A significant rival index group to DJSI is MSCI. Current estimates suggest that $85 billion in equity AUM is benchmarked against MSCI ESG Indexes. More than half of MSCI-branded ESG indexes are inclusionary. At the same time, only two out of seven are exclusionary on subjects about A&D. MSCI also customizes ESG indexes for clients (private label). As a result, over 700 ESG indexes provide an inclusionary versus an exclusionary mix of which is not accessible.

“The rapid growth in indexing throughout the asset management industry and the use of customized or private label ESG indexes by institutional investors has contributed to the expansion of best-in-class and inclusionary ESG investment strategies,” observed Paul Ellis, recognized expert and advisor on sustainable investing.

Using AlphaSense

In developing this blog, I used AlphaSense to run ESG/sustainability-related queries, using the Timeframe filter to limit the results to the last 12 months. I further filtered my results using the Industries filter only to include Aerospace & Defense results:

• ~285 A&D companies when searching all documents, including global filings
• ~60 companies were listed in results of ESG/sustainability-related searches on proxy filings, annual reports, presentations, and press releases. Of which,
• ~10 companies appear most often. Their ESG / sustainability communications are geared toward investors and are quickly searchable on AlphaSense.
• Based on simple math, these ten companies make up ~17% of the 60 companies with ESG/sustainability-related searches and ~4% of the larger universe of the global A&D industry captured by AlphaSense.
• Using AlphaSense, I was able to find an aftermarket research (a.k.a. sell-side research) report referencing ESG / sustainability for companies covered by just one firm, HSBC ($HSBC)

Given the looming sell-side business model challenges anticipated in advance of the new European Securities and Markets Authority MiFID II regulation going into effect next year, ^[12] A&D sell-side analysts might be interested in knowing of this gap. However, they might be missing coverage on this aspect of growing consideration to A&D companies, supply chain, and investors that could be competitively helpful to the analysts’ survival.

Final Note

It is fitting to end this blog with an excerpt from the Aerospace Industries Association (AIA) from their May 5, 2017 press release:

“America’s Aerospace and Defense (A&D) companies care a great deal about environmental stewardship… we remain proud to lead the way on environmental sustainability, capitalizing on the innovation at the core of our industry towards identifying goals and policies that will ensure short-term successes while constantly searching for future innovations in areas that will yield long-term sustainability… As a leader in the American economy, we take our responsibility to also leading the way on sustainability and innovation seriously…” ^[13]

Disclaimer: All conclusions above were made by inference that AlphaSense can capture ESG/sustainability-related communications by the companies mentioned and should be recognized as incomplete. The narrow keyword searches and other research references were used. It is impossible to identify the existence of sustainability reports using AlphaSense unless the Company issues a press release found by AlphaSense; a significant number of A&D companies publish sustainability (or CSR) reports and maintain sustainability-related website pages on their company websites. Further research is beyond the scope of this blog.

**Digital Global was recently acquired by MacDonald, Dettwiler, and Associates Ltd and combined with other companies to form Maxar Technologies [$MAXR], a geospatial company. The announcement occurred on November 13, 2017. 

Pamela Styles is principal of Next Level Investor Relations LLC, an Investor Relations consultancy with dual IR and ESG/Sustainability specialties.