December 11, 2017

ESG/Sustainability In Aerospace And Defense

Pamela Styles principal

Let’s dispel an important 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 sustainability investing is dominated by exclusionary 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 the point of effectively becoming part of the mainstream lexicon for both investors and companies alike and about its expanding significance in capital competition. I’ve also shared U.S. SIF regular tracking that confirms inclusionary sustainability investment strategies, now with as much as $5.8 trillion AUM engaged in ESG integration, having overtaken exclusionary strategies.

Sustainability Investing In The U.S.

To add to this: 

  • McKinsey & Company recently published results of its study on advancement in sustainability investing in which it noted: “While early ethics-based approaches such as negative screening remain relevant today, other strategies have since 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) is currently estimated to have a global sector market capitalization of $725 billion. It is a sector in which 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 being benchmarked against MSCI ESG IndexesMore than half of MSCI-branded ESG indexes are inclusionary, while only two out of seven are exclusionary on subjects pertaining to A&D. MSCI also customizes ESG indexes for clients’ (private label), of which there are over 700 ESG indexes, providing an inclusionary versus exclusionary mix of which is not obviously accessible.

“The rapid growth in indexing throughout the asset management industry, as well as 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 the process of 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 to only include Aerospace & Defense results:

  • ~285 A&D companies when search 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 apparently geared toward investors and are quickly searchable on AlphaSense:

Sustainability In Aerospace and Defense

  • Based on simple math, these 10 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 looming sell-side business model challenges that are being 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 to know of this gap. It appears that 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 in that AlphaSense is able to capture ESG / sustainability related communications by the companies mentioned and should be recognized as incomplete. Omissions or absence of company recognition may have occurred, given the limited key word searches and other research references used. It is not possible to identify the existence of sustainability reports using AlphaSense, unless the company issues a press release that is found by AlphaSense; a significant number of A&D companies do publish sustainability (or CSR) reports and / or 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 literally occurred November 13, 2017 as this blog was being written. 

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

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