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ESG performance is key focus for aviation and aerospace industry

Aviation and aerospace companies face requirements and expectations as a result of environmental, social, and governance (ESG). It is now more critical than ever to identify the risks and opportunities arising from ESG factors to safeguard long-term viability and resilience.

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09/07/2021 · 5 minutes read

The aviation and aerospace sector is increasingly challenged by the requirements and expectations of shareholders, employees, customers, and other stakeholders relating to environmental, social, and governance (ESG) issues.

ESG strategy is vital

New equipment and technologies, geopolitical questions, reporting requirements, and regulations are evolving rapidly in response to the transition to a more sustainable global economy.  

It is now more critical than ever for an organization to identify the risks and opportunities arising from ESG factors to safeguard its long-term viability and resilience.

While there is no conclusive list of ESG risks for companies to consider, they usually include a blend of the following.

Environmental

Criteria examine an organization’s impact on the planet, which for the aviation and aerospace industry is particularly relevant.

Focus is placed on a company’s total emissions, as a measure of its commitment to addressing climate warming. An organization’s plan for transitioning to low carbon usage, as a means of ensuring energy security, is also taken into account.

The Greenhouse Gas Protocol Corporate Standard, classifying a company’s greenhouse gas emissions into three scopes, is an important tool for aviation companies to use in setting targets for a low carbon path. In the aerospace sector, the environmental impact of manufacturing activities and materials is considered as a gauge of environmental performance.

Across the sectors, there is reputational risk associated with the quality of ESG policies, as companies are compared with each other on how well they are tackling sustainability.

Social

Criteria examine how a company treats and values its employees and broader community. Considerations can include:

  • An organization’s labor management policies;
  • Its commitment to inclusion and diversity strategies as a way of fundamentally improving the business;
  • and its commitment to product safety and quality.

An organization’s impact on the local community, be it positive or negative, is usually taken into consideration. This could include the costs and benefits of an airline operating in a territory.

In aerospace manufacturing, supply chain ethics and relationship management are increasingly crucial social considerations, in order to ensure fair labor standards are maintained and enforced, from the collection of raw materials to the manufacture of finished aerospace products.

Governance

Criteria assess a company’s corporate governance practices focusing on board structure, in particular board diversity, audit quality, transparency, and issues surrounding remuneration, including executive compensation.

Key governance activities for companies include compliance with the progressively stringent obligations and frameworks introduced by regulatory bodies, such as the International Air Transport Association (IATA) and International Civil Aviation Organization (ICAO), the latter of which has implemented the pilot phase of the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA).

It is important to note that environmental legacy – the lasting impact an organization’s actions and activities have on the earth — is a fundamental governance consideration. 

Stress testing of ESG and climate change

Companies in the aviation and aerospace industry currently differ in their preparedness for climate change and the transition to a sustainable world economy.

In a recent survey by Marsh, 60% of respondents in the sector recognized climate change and ESG factors as impacting clients and customers, who are core to their business.

However, half of the companies questioned had a somewhat limited measurement of current climate change and ESG risks, while the remaining half said they were not stress testing the threats at all.  

This research highlights the need for the industry to be better prepared for the transition to a more sustainable economy, during which organizational agility to respond to new laws, requirements, and customer expectations is key.

Conclusion

Plans set today are vital for the long-term sustainability and resilience of the aviation and aerospace sector.

Key actions to take include:

  • Assess the implications of ESG for your organization by utilizing industry data, risk indices, physical climate models, and key stakeholders’ perspectives.
  • Analyze and establish the means to control the physical, transition, and reputational risks associated with ESG for your organization.
  • Analyze the requirement for external reporting.

Acting upon the above will support the implementation of ESG priorities in line with an organization’s risk appetite and will yield practices within established environmental resource management and resilience frameworks.

If you have questions on your ESG and climate change risk, please contact your Marsh advisor.

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