ESG in Aerospace and Defense: Macroeconomic Trends
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ESG in Aerospace and Defense: Macroeconomic Trends

By GlobalData Thematic Research 04 Oct 2021 (Last Updated October 4th, 2021 07:10)

Defense primes and militaries are focusing on social sustainability and good corporate governance to scale their investments and reputation.

ESG in Aerospace and Defense: Macroeconomic Trends
Credit: Baiploo/Shutterstock.com.

Modern militaries are not only adopting ESG strategies, but are looking to improve their visibility and control throughout the supply chain, and bolster their governance and cybersecurity systems to prevent cyberattacks and ransomware attacks.

Listed below are the key macroeconomic trends impacting the ESG theme, as identified by GlobalData.

Covid-19

The International Air Transport Association (IATA) estimates that global passenger demand for 2020 fell by approximately 66% compared to 2019, due to Covid-19. 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 is expensive and unlikely to be profitable in the future, such as wide-body aircraft. It could be an opportune moment for the inclusion of electric aircraft within their fleets.

Offset agreements

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. 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.

Green Restart

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.

The commercial aerospace industry has long been the target of scrutiny, given its large carbon footprint. It is possible that, post-Covid-19, more stringent measures to mitigate the climate crisis will be enacted. These measures would heavily impact commercial aviation in its current form. Therefore, the demand for cleaner alternatives will be greater, and the development of such alternatives more urgent.

Single / Sole Source contracts

Single Source procurement is when contracts are awarded without competition to a selected contractor. Historically, Ministries and Departments of Defense have awarded a significant proportion of contracts without open competition for various reasons, most commonly on national security grounds or because there is only one specialist supplier available.

Single‐source procurement is prevalent throughout the defense industry in both developing countries and advanced arms-exporting countries. Abstaining from the usual competitive bidding process presents risks surrounding accurate financial evaluation and corruption. While there can be good reasons for single sourcing, the opportunities for corruption are significant.

This is an edited extract from the  ESG (Environmental, Social, and Governance) in Aerospace and Defense – Thematic Research report produced by GlobalData Thematic Research.

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