COP27 intensified the pressure on global businesses to decarbonise and plan positive contributions to a low carbon transition. But these 3 key challenges unique to the Aerospace and Defence industry sector remain unanswered.
Conflicting investor and stakeholder priorities through a low carbon transition
In the last two decades, Global Aerospace and Defence expenditure has increased significantly(1), and the trend is expected to continue. In alignment with the global ambition to achieve Net Zero emissions by 2050, the sector is expected to take decisive action on decarbonisation by investing in new green technologies. However, technology has yet to catch up, and therefore operational effectiveness is still reliant on fossil fuel consumption.
This leaves defence manufacturers in a position of tension, caught between a market demand for products which can go further, faster and with greater capability, and an investor/lender community which is under significant pressure to decarbonise. The potential consequence of this for the defence manufacturer is a significantly increased cost of capital in order to meet market demand.
How can the sector align itself throughout the value chain, to protect value and meet client requirements?
As the effects of climate change become more dramatic, the occurrence of acute climate events and associated economic disruption may continue to drive geopolitical unrest. Simultaneously, disclosure frameworks from the TCFD and SEC are requiring all industries to plan for the transition to a low carbon economy. In preparation, the sector will need to anticipate the impacts of climate events on its operations, and those who are best prepared will benefit most from these shifting markets.
Additionally, to ensure uninterrupted service and sustainable production, the sector will require a supply chain that is climate adaptive and low on carbon footprint. All of this must be achieved in balance with customer and investor pressures highlighted above.
Detailed and comprehensive scenario planning is therefore critical for the A&D sector to anticipate exposure, and capitalise on opportunities, arising from a complex global response to the increasing effects of climate change.
The launch of the Transition Plan Taskforce’s (TPT) gold standard guidance for climate transition plans at last year’s COP27 sees a progression from target setting to implementation. This is a significant undertaking and goes well beyond simple target setting – and we’re expecting to see this become a regulatory requirement in the UK as early as FY24.
A Transition Plan represents a strategic transformation to incorporate climate considerations into every aspect of corporate strategy, considering what action will be taken, at what cost, how it will be funded, skills gaps for delivery and a detailed engagement plan across stakeholders.
You can learn more by reading our article: Preparing your organization for climate transition plans.
The next evolution of climate disclosure is significant but presents a clear framework and an opportunity to maximise value, through considered and targeted transition planning.
If you have any concerns regarding these challenges and ESG topics, feel free to contact us. We’d be interested to hear what questions and concerns you may have.
(Sources: 1. Trends in world military expenditure, 2021, SIPRI )
In the fourth article in our climate risk series, we discuss our four-step approach to climate risk and opportunity.
In the fourth article in our climate risk series, we discuss our four-step approach