Chief Executive’s review 2022
Melrose’s strategy remains focused on reshaping the performance of good quality industrial manufacturing businesses, from a financial, operational and sustainability perspective.
Reflecting on the last few years of our evolving and strengthening Group sustainability framework, sustainability performance and climate considerations are evermore prominent within our strategy, particularly the “Improve” limb.
In 2022, we continued to invest in our businesses, supporting their pursuit of sustainability improvements for long-term operational, financial and commercial success, and in their continued efforts to lead their industries towards innovation for decarbonisation. Two of our market-leading businesses, GKN Automotive and GKN Powder Metallurgy, are great examples of a comprehensive and successful transformation, now nearing completion under Melrose’s ownership ahead of their demerger from the Group in the first half of 2023. Well positioned to deliver shareholder value as an independent automotive-focused company, GKN Automotive and GKN Powder Metallurgy are setting off on their own journey to pursue significant growth opportunities aligned with the global transition to electric vehicles (“EVs”). Underpinned by our Group sustainability targets and principles, this transformation illustrates the success of our business model, and our decentralised approach to empowering our businesses to align their ambitions and tactical sustainability actions with the most pressing challenges faced by their sectors, customers, suppliers and other key stakeholders.
As a premium listed company, we are accountable to our shareholders and broader stakeholders to ensure that our sustainability strategy and performance are meaningful, impactful and relevant to their expectations. Our limited ownership tenure for each business we acquire requires us to prioritise our efforts towards improvement measures. It revolves around the following strategic areas that we expect to have the most impact on our businesses and their sectors:
- the setting of sustainability priorities for our businesses, informed by data-driven analysis;
- the drive for improvement measures based on long-term benefits to our businesses as they work towards thriving in a post-transition economy;
- investment appraisal focused on both operational efficiency improvements and climate-focused offerings; and
- strong governance and risk management principles upheld by the Group and instilled throughout our businesses.
Despite our limited ownership period, we act as if we were to own our businesses forever, and in doing so, we do not shy away from the challenging backdrop presented by the traditionally carbon-heavy industries in which our businesses tend to operate. We strongly believe that meaningful sustainability improvements towards transitioning those more challenging industries to a greener future will propel global efforts to achieve Net Zero by 2050.
Divisional 2022 sustainability highlights
GKN Aerospace – making zero-emission flight a reality
GKN Aerospace continued to advance its contributions to a more sustainable, next-generation aircraft. Industry-leading solutions within its Engines and Structures businesses include additive manufacturing (“AM”), advanced composites and alternative fuel such as electric, hydrogen and eVTOL. With the newly acquired AM system business Permanova, GKN Aerospace can now reduce material and energy use by up to 80% compared to conventional manufacturing techniques, thus reducing associated emissions to contribute to the industry’s Net Zero commitment. Further cementing its sector leadership, GKN Aerospace also continued to support some of the industry’s progressive programmes aimed at reducing the carbon footprint of today’s aircraft, including its H2JET programme in Sweden, the European Clean Sky2 programmes and its UK-led H2GEAR project.
GKN Automotive – driving the transition to electrification
GKN Automotive continued to expand its core sideshaft portfolio, with further innovations to match the changing demands of new EV platforms. The business completed over 50 new programme launches and continued to secure a significant share of new business wins on EV platforms, achieving the milestone of powering two million EVs with its eDrive technology. The continued innovation of its portfolio in 2022 saw the design launch of a next-generation inverter, compatible with the most advanced EV technology, offering faster charging times, increased battery size, and improved performance for future EVs. The overall portfolio is delivering consistent revenue growth as the business leaves the Group with significant momentum and leading positions to benefit from both market recovery and the accelerating vehicle electrification trend.
GKN Powder Metallurgy – innovative metal powder production
As part of its ambitious strategy to be a global leader in the transition to electrification, GKN Powder Metallurgy continues to provide best-in-class innovative solutions for production of metal powders from metal scrap, sinter metal components and AM. By recycling and conserving metal powder, which is more expensive than conventional steel, GKN Powder Metallurgy’s processes help reduce potential raw natural resource consumption and yield lower emissions. In 2022, its core business was complemented with a commitment to pursue incremental long-term growth opportunities in the new market for permanent magnets for EVs, leveraging its industry expertise, existing production processes and low waste manufacturing capabilities in North America and Europe.
GKN Hydrogen – reliable and secure hydrogen energy storage solution
Following its separation from GKN Powder Metallurgy, GKN Hydrogen continued to focus on further developing its modular systems that generate green hydrogen from fluctuating renewable energy sources. Its proprietary solution for compact and loss-free storage in metal hydride over long periods of time will make the green hydrogen available, when needed, for direct use or converting back into electricity and heat. In 2022, the business continued to work with requirements and ensure maximum efficiency and flexibility of energy output, further strengthening the offering with a tech-enabled application for instant data collection for future analysis and predictive maintenance.
Group 2022 sustainability milestones
Advancing our businesses’ sustainability strategies
We continued to work with our businesses to further advance their standalone sustainability roadmaps and drive successful implementation. The expanded data collection and measurement have enabled the Group to better track progress against targets and other KPIs, and leverage performance data to ensure that our businesses each prioritise areas of most importance and materiality as identified by the Group in collaboration with their executive management teams to focus their investment and resources on areas where they will have the greatest impact. Determined to lead their industries towards more sustainable business conduct, in many areas our businesses have either achieved our Group targets ahead of time, or have set even more ambitious objectives reflecting the most pressing sustainability challenges across their respective sectors.
Group sustainability performance
We have made good progress in achieving our Group sustainability targets during 2022. Notably, our near-term waste reduction target for diversion of 95% of solid non-hazardous waste from landfill has been achieved, and the Group is in a good position to achieve our 100% target by 2030. Additionally, we recorded a 13% reduction in water withdrawal and a 9% reduction in Scope 1 and Scope 2 emissions intensity compared to 2021, and we are on track to achieve the respective reduction targets. We are also making positive strides in regard to investing in climate-related R&D, driving product development to contribute to the decarbonisation of our businesses’ sectors and ensure that they operate at the very forefront of commercialisable climate-focused innovation and technology.
Group sustainability governance improvement
In efforts to further strengthen our sustainability framework, we addressed and bolstered the governance of our material sustainability topics which were elevated in our materiality matrix, by rolling out three new Group compliance policies, Supply Chain, Water and Biodiversity across our businesses. Delivering on our promise to further advance our climate-related disclosures, we made good progress on refining our understanding of associated risks and opportunities in the second Group TCFD report and launched our inaugural Group Net Zero Transition Plan. We also took charge in advancing our businesses’ efforts in engaging with their suppliers with a view to gain better visibility of their climate programmes and start to explore opportunities for engaging with them as we seek to reduce our Group Scope 3 emissions footprint.
Outlook for 2023
In 2023, we will continue to oversee and enhance the Group’s and our businesses’ sustainability performance with the following key areas of focus:
- Setting a Group commitment relating to the setting of Science Based Targets (“SBTs”) within our businesses;
- Developing internal Melrose sustainability measurement tools to display our businesses’ quarterly performance against our Group targets and bolster regular engagement to measure and track progress, with a view to further their improvement efforts in impactful areas;
- Increasing our Diversity and Inclusion commitment to maintain 40% female representation across the Board and to achieve 40% female representation at Melrose Executive Committee level, in line with the new FTSE Women Leaders Review target;
- Continuing to engage with our businesses’ suppliers with a view to expanding our Scope 3 data reporting;
- Continuing to evolve the Group’s understanding and assessment of biodiversity factors prior to the official release of a global Taskforce on Nature-Related Financial Disclosures (“TNFD”) framework;
- Continuing to evolve the Group’s TCFD disclosures, with increased linkages to quantitative data within the Annual Report and financial statements where relevant and appropriate;
- As part of the renewal of the Company’s Directors’ Remuneration policy in 2023, further integrating ESG into executive remuneration by proposing to carve out a standalone element of the annual bonus for ESG metrics.