GLOBAL - Investors in the aerospace and defence (A&D) sectors face a number of environmental, social and governance (ESG) issues, as new pressures are mounting, according to a report by the European Sustainable Investment Forum (Eurosif).

With cluster munitions financial investments already banned in some EU countries, sustainable fuel sources and supply chain issues are among the most pressing challenges faced by the A&D sectors.

Jet kerosene accounts for 25% of total airline costs, making climate change and rising oil prices one of the key challenges for the aerospace industry.

With the EU Emission Trading Scheme taking effect on 1 January 2012, the report finds that the demand for alternative fuels is expected to grow in the coming years.

Eurosif president Giuseppe van der Helm said: “As air travel continues to become more important to the global economy and more accessible to the public, it is imperative that this industry maintains a level of integrity in its environmental impact, as well as its service standards.

“The research and development of alternative fuels is just one way to ensure this sector’s longevity - product quality is also of the utmost importance for passenger safety and business’ reputations.”

Flattening military budgets and new international weapons legislation expected to come into force in 2012 are some of the issues affecting the defence sector.

The report also finds that, due to the secretive nature of the sector, corruption and bribery issues are likely. Research shows that approximately 60 listed companies are involved in controversial weapon production globally, with the A&D sectors being subject to international regulation, such as the Arms Trade Treaty, currently negotiated by governments.

Investors are increasingly avoiding investments in companies involved in controversial weapon production, transfer or stockpiling, according to Eurosif.

Diederik Timmer, Sustainalytics managing director for Europe, said: “Aerospace & Defence companies that demonstrate leadership in the areas of ethics and sustainable innovation will be the winners of tomorrow.

“Therefore, investors have the opportunity to contribute to sustainability by investing in companies that demonstrate leadership by implementing sustainable business practices. By doing so, investors can benefit from high performance, while mitigating risks in the medium and long term.”

The report also discusses the A&D sector’s operation shift to emerging markets, as some of these countries have recently become top weapons importers, and their labour costs are still low compared with other countries.

Research for the report was provided by Sustainalytics, and the project was supervised by a steering committee of representatives from CM-CIC Asset Management, ECPI and Edmond de Rothschild Asset Management.

The report can be downloaded here.

Meanwhile, MSCI has launched 25 new MSCI ESG indices, including MSCI Global ex Controversial Weapons indices, MSCI Global Socially Responsible indices and new regional and country ESG indices.