Nary a week goes by without a Western aerospace and defense company issuing a statement that revolves around environmental, social and governance (ESG) concerns. Although most announcements assert how already planned products or services align with global ESG ambitions, increasingly companies are making bold promises about how they themselves will be ESG models.

On Aug. 13, Brazil’s aerospace and defense (A&D) crown jewel declared a commitment to carbon-neutral operations by 2040 and said it was “stepping up” efforts to get there. “At Embraer, we recognize the urgency of the climate crisis, and we are fully committed to a more sustainable future,” says Francisco Gomes Neto, president and CEO. “ESG is at the heart of Embraer’s purpose, and that’s why we’ve included ESG as one of the pillars in our strategic plan Fit for Growth, aligning business strategy with social responsibility and environmental practices.”

• Large OEMs, primes and Tier 1s rank better in setting high standards
• How much that helps companies or the industry remains to be seen

But not all corporate declarations are the same. How do stakeholders get a sense of whose proclamations are more than just words? One group—investors, unsurprisingly—is already well into figuring out which company’s plans meets certain ESG criteria, and this summer saw the release of a few relevant reports.

A team of Jefferies analysts, for instance, issued a 57-page report on environmental plans at major publicly traded A&D companies that their investment bank group covers.

Of 30 covered stocks, seven (23%) factored environmental sustainability performance into their annual incentive compensation packages for executives. The combination of a set of long-term targets for six tracked metrics (see table) and incorporation into compensation pointed to Honeywell International, Northrop Grumman and Raytheon Technologies as the standouts for active environmental management.

Among defense companies specifically, Lockheed Martin stands out with 30% of compensation tied to management’s strategic and operational targets, including a clear set of corporate objectives for water, energy and mineral usage. General Dynamics, home to business jet giant Gulfstream, includes the promotion of sustainable aviation fuel (SAF) among its 30% weighted strategic metric. This year, Raytheon also added a 10% weighting for sustainability and safety. Northrop allows for a performance boost for operational efficiency, including greenhouse gas (GHG) emissions, water consumption and waste diversion.

Among government information technology service providers, many of which serve A&D customers, Leidos and Parsons identify strategic goals as 20% of their target to meet incentive compensation, including meeting Leadership in Energy and Environmental Design (LEED) green-building construction certifications.

Honeywell was the only commercial aerospace company that the Jefferies group covers to consider environmental performance for compensation, with a 20% weighting to targets, including so-called green technology and GHG-emission cuts.

In a separate 60-page report last October on social factors—the “S” in ESG—the Jefferies group deemed Booz Allen Hamilton from the information technology niche to be the clear winner across A&D-related stocks. Social aspects are measured in regard to diversity within a company’s board of directors and management as well as other workforce issues. In the top ten after Booz were Science Applications International, Lockheed, Boeing, Textron, Raytheon, Leidos, Northrop, Elbit Systems and Triumph Group.

Of course, how much difference it makes to be at the top of these lists remains to be seen, particularly since the A&D industry generally suffers pariah status with ESG investors. As a July report from Morgan Stanley analysts noted, most publicly traded A&D companies are tied to controversial weapons systems one way or another. In addition, aviation is currently responsible for 2-3% of global carbon dioxide emissions and, systematically, is expected to be one of the most stubborn industries to decarbonize.

Looking back at what they have learned about ESG from investors in Europe, where the trend started about five years earlier than in the U.S., the Morgan Stanley analysts found that top-down, exclusionary investor policies toward A&D—no matter other fundamental or ESG considerations—obviated anything else. Even those without exclusionary policies were hesitant to invest in A&D.

“Perception has as much impact as reality,” the Morgan Stanley team noted. “Many investors, even those not constrained by exclusionary policies, are concerned about rising ESG [investment] flows and potential negative impacts on multiples.” The team points to fossil fuel concerns, a precursor investment theme to ESG, that drove investment asset managers to dump stocks related to oil and other industries caught in environmental concerns.

But perhaps American investors, even ESG-oriented funds, are more lenient considering the U.S.’ role as a global superpower. At the same time, A&D companies are becoming “highly engaged” on ESG concerns, Morgan Stanley notes. Corporations have focused on highlighting ESG moves in investor outreach strategies and devoted senior management resources toward ESG-focused investor briefings, company reports and investor conferences.

“Sustainable investing is a spectrum with a large and growing cohort of ‘mainstream’ investors integrating ESG—a lens within a broader investment framework,” the Morgan Stanley team noted. “We believe A&D equities might, in some instances, fit within the less-defined integration strategies.”

Above all, financial results still matter, even in ESG investing. “Over the past five years, and despite ESG concerns, the A&D sector has rerated higher,” they wrote. “While . . . assessing ESG issues [is] important, fundamentals should remain the dominant driver of stock performance.”