Sustainability in the global defence industry

Sustainability is a priority in the defence industry in order to attract environmentally conscious customers. Using information gathered by ICD Research, details sustainability trends within the global defence industry in 2011-12.

From the survey results, it is clear that, for most respondents, sustainability is a priority in the defence industry, necessary to attract environmentally conscious customers, compete for major contracts and comply with government and international legislation. This is reflected by the fact that, on average, respondents expect to allocate 34% of their procurement budgets to sustainability initiatives over the next 12 months and anticipate an average saving of 7% in organisational expenditure as a result of these initiatives.

In terms of supplier selection, the most important factors identified by respondents were effective health and safety (EHS) management systems, reduction of greenhouse gas (GHG) emissions and the use of recyclable or reusable product components. Survey respondents identified the US, Germany and India to be the most promising markets for defense sustainability.

"Sustainability budgets of defence organisations are expected to rise by 7% over the next 12 months."

Budget increases

ICD Research's industry survey revealed that, on average, buyer sustainability management budgets are expected to rise over the next 12 months by 7%, compared to an average expected increase of 6.8% in 2010. Defence contractors, on average, expect to witness a 6% increase in their sustainability budgets over the next 12 months. Other service providers also expect to see a similar increase. This is higher than the 2010 survey, when respondents from supplier companies predicted an average increase of 4.9%.

The increasing need to adopt sustainable practices, requests from field units and the interest of internal management in sustainability issues are considered significant drivers of the expected increase in sustainability budgets.

"Increasing requests from field units for adoption of renewable energy practices has forced us to increase our sustainability investment," states a senior-level member of a defence organisation in the Asia-Pacific region.

This positive trend indicates a rising awareness among defence organisations towards sustainability management. Indeed, the results suggest that implementation of sustainability practices, use of sustainable products, an increase in the use of renewable energy and a clear commitment to preserve natural resources are the key future priorities for defence organisations.

During the next 12 months, companies throughout the defence supplier industry expect an increase in profitability due to the adoption of sustainability practices. Of the respondents from defence contractor companies, 39% expect an increase in profitability, as compared to 44% of other service provider respondents. Respondents consider cost savings, increasing client demand, optimal resource utilisation and energy efficiency as important stimuli for sustainability.

The use of sustainable materials in production may not produce immediate results; however, in the long-term it is expected to reduce waste, emissions and pollution. This strategy may also reduce the potential for shortages and reduce exposure to price fluctuations of fossil fuels.

Agreeing to this trend, a director-level executive of an other service provider from the Rest of the World region states: "Recycling certain materials reduces overall production costs. Energy-efficient systems become more and more profitable as electricity, natural gas and fuel prices rise. Use of solar and wind power in isolated facilities has lowered setup costs, increasing our profit margins."

On average, defence contractors expect to achieve savings of 7% in terms of organisational expenditure, while other service providers expect to save 8%. Notably, a total of 54% and 53% of respondents from defence contractors and other service providers, respectively, expect to save 'less than 5% of their organisational expenditure'.

"Effective health and safety (EHS) management systems, reduction of greenhouse gas (GHG) emissions and use of recyclable and reusable product components are critical sustainability criteria for supplier selection."

A total of 52%, 48% and 48%, respectively, of respondents from defence organisations consider 'effective health and safety (EHS) management systems', 'reduction of greenhouse gas (GHG) emissions' and use of 'recyclable and reusable product components' to be critical factors for supplier selection.

Suppliers to the defence industry do not assign similar importance to these factors. Defence contractors consider 'certification and compliance with ISO 14001', 'reduction of energy consumption' and 'reduction of GHG emissions' to be important, while other service providers consider 'reduction of energy consumption', 'recyclable or reusable product components' and 'effective minimisation of waste' to be important.

Supply and demand

The top three regions expected to experience the fastest growth in the defence industry in the next 12 months are forecast to be the US, Germany and India, an opinion voiced by 65%, 57% and 52%, respectively, of respondents from defence organisations. A total of 50% of respondents from defence contractors consider 'the US to provide the highest growth potential for sustainable products and services, while 44% of respondents each consider Germany and India as important markets.

The US has a small but growing proportion of its defence budget dedicated towards sustainability. With its intention to play a crucial role, the US Department of Defense (DoD) issued a green procurement policy in 2004, which was last updated in November 2008. The policy guides the department's civilian and military personnel on procuring products and services that benefit the government andoutlined a strategy designed to satisfy such requirements, along with metrics for measuring progress.

On average, defence organisations plan to allocate 34% of their total procurement budgets to sustainable products and services in 2011-12. Notably, 24% of respondents from defence organisations expect to allocate over 50% of their procurement budgets towards sustainable products and services, while 14% of respondents expect to allocate less than 10%. Another 10% of respondents expect to allocate between 20-30% of procurement budgets.

A total of 44% of respondents from defence organisations consider 'materials that reduce direct operating costs' to be the most important attribute when considering green products and services. Green procurement includes the acquisition of recycled content products, environmentally preferable products and services, bio-based products, energy and water-efficient products, alternate fuel vehicles and alternative fuels, products using renewable energy, and alternatives to hazardous or toxic chemicals.

'Energy efficient facilities', 'reusable and easily disposable products' and 'alternate fuel vehicles' are identified as the products and services most expected to see an increase in demand, as noted by 59%, 45% and 41%, respectively, of respondents from defence organisations.

"Corporate and brand websites, online portals, public relations and conferences and events to dominate future investment in media."

'Corporate or brand websites', 'public relations' and 'online portals' are considered to be the most important marketing channels by 34%, 22% and 22%, respectively, of respondents from defence contractors. 'Email and newsletters', 'online portals' and 'conferences or events' are considered the most important marketing channels by 37%, 30% and 29%, respectively, of respondents from other service providers. Notably, respondents from defence contractors and other service providers considered the same channels to be effective in the 2010 survey.

'Efficiency and cost effectiveness' and 'customer satisfaction' are each identified as the most important drivers for green marketing by 49% of respondents from defense contractors. 'Efficiency and cost effectiveness', 'competitive advantage' and 'customer satisfaction' are other important drivers for green marketing identified by respondents from the other service provider segment.

Survey results reveal that defence contractors consider marketing strategies such as the need to 'explain cost-benefit of sustainability to clients', sending 'educational marketing messages' to the potential clientele and 'communication with socially responsible investors' to be important in order to market their green credentials to clients. In addition, other service providers also consider it important to 'add a certification seal to the product' and produce 'white papers and reports' for explaining the benefits of sustainability.

iCD Research

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