Welcome to the latest edition of Gilmartin Group’s ESG newsletter and our first release for 2023. With a special focus on the healthcare sector, this newsletter sheds light on the latest trends in the rapidly evolving ESG space, covering developments with companies, investors, regulators, and policymakers.
In The Spotlight
Republican U.S. politicians are continuing their campaign against BlackRock and other asset managers for incorporating ESG standards into investment processes. Most notably, Florida Governor Ron DeSantis pulled $2 billion of the state’s investments from the firm in December. While BlackRock disputed erroneous claims that the firm “boycotts” fossil fuel companies, pressure is also mounting from the opposite end of the ESG spectrum. Activist investor Bluebell Capital Partners, a small London-based hedge fund, has called for BlackRock CEO Larry Fink to resign, alleging the firm has put its investments at risk by becoming “a big target of conservative ire while also failing to step up in some ESG situations.” Bluebell specifically pointed to BlackRock’s policy on thermal coal investments, noting that BlackRock remains a top shareholder of intensive coal miners even though Larry Fink stated in his 2020 Annual Letter to CEOs that the firm would exit “investments that present a high sustainability-related risk, such as thermal coal producers.”
In response to the political backlash, Fink has stood his ground, noting in a recent interview at the World Economic Forum:
“We lost about $4 billion of flows from various states, but in long-term flows last year we were awarded $400 billion. Just last year in the United States our clients entrusted us with an additional $230 billion. So you tell me.”
Fink’s Annual Letter is one of the most anticipated and widely-read publications in the ESG space, so stay tuned for the 2023 edition to be published in the next few weeks.
Surveying the relationship between human health and climate change, the Lancet Countdown’s latest annual report determined that “climate change is undermining every dimension of global health.” The report found that heat-related deaths increased by 68% between 2000–04 and 2017–21, and that extreme heat also exacerbated food insecurity, with 98 million more people reporting moderate to severe food insecurity in 2020 than during each year between 1981–2010. Calling for a “health-centered response,” the Lancet highlighted actions that could both mitigate the impacts of climate change and improve human health. For example, the Lancet noted that shifting away from fossil fuels and towards more sustainable energy systems could prevent deaths resulting from fossil fuel-derived ambient air pollution, which totaled 1.2 million in 2020.
Separately, academic researchers have called for mandatory emissions reporting from U.S. healthcare organizations, noting that standardized metrics for reporting healthcare greenhouse gas emissions are “essential to quantify progress, identify best practices, and ensure accountability.” Researchers at Baylor College of Medicine and other institutions proposed “that all healthcare organizations should start measuring and reporting greenhouse gas emissions for transparency, accountability and improvement purposes.” The group’s research found that “voluntary initiatives are clearly not working” and that “healthcare organizations lag behind other industries in environmental performance reporting when they should be leading in matters pertaining to good corporate citizenry for healthier populations.” The authors acknowledged the competing priorities and resource constraints faced by healthcare organizations and called for policy innovations to support greenhouse gas emissions measurement, accounting, and reporting processes.
In The Weeds
Last summer, we wrote about how Abbott Laboratories’ baby formula recall demonstrated that product quality and safety issues can have wide-ranging effects on how a company is perceived from an ESG perspective. Ironically, despite the high-profile nature of Abbott’s recall, ESG ratings firm MSCI upgraded the company’s overall ESG rating. Although MSCI concluded that Abbott was an industry laggard on the issue of product quality and safety, the firm upgraded Abbott’s ESG rating from BB to A, citing the company’s strong performance on corporate governance and wider scoring improvements across the healthcare equipment and supplies industry. MSCI also deemed Abbott to be an industry leader in human capital development issues.
Another prominent healthcare equipment and supplies company that dealt with a major product recall recently, Koninklijke Philips N.V. (Philips), did not receive the same treatment from MSCI. Although Philips’ ESG rating benefited from MSCI’s recent industry rebalancing, the company was actually downgraded following its recall of sleep apnea devices beginning in the summer of 2021. MSCI viewed Philips as an industry laggard on product quality and safety, like Abbott, but Philips was not determined to be an industry leader in any ESG rating category.
Attributing the scoring gap between Abbott (A) and Philips (BB) in part due to their relative performance on corporate governance and human capital management, we speculate that healthcare equipment and supplies companies with strong practices and disclosures on these topic areas can help offset the negative ESG rating impacts stemming from controversies such as product recalls.
A Note on ESG Investing
Describing ways that the Schroders U.S. Small Cap team looks beyond traditional ESG ratings agencies in assessing potential investments, the investment manager analyzed how most ESG investment products are biased towards large companies. Schroders found that large cap companies received “on average a 32% better MSCI score and an 18% better Sustainalytics score” than small cap companies. Schroders attributes this bias to the extra resources that larger companies have to report on their ESG performance compared to small caps. Schroders believes that small caps’ “sustainability profiles are significantly discounted by the market” and that these companies are poised for upgrades to their sustainability scores and broader recognition by ESG investors.
One Big Thing
The 2021 United Nations Climate Change Conference (COP 26) made headlines around the world as countries accounting for 90 percent of the world’s GDP, including the U.S. and India, pledged to reach net-zero emissions by the middle of the century. Although the 2022 conference (COP 27) was not as widely followed, the U.S. Department of Health and Human Services (HHS) sent a delegation to report on the progress of the “Health Sector Climate Pledge.” Unveiled on Earth Day 2022, the pledge was launched by the White House and HHS as “a voluntary commitment to climate resilience and emissions reduction” for the healthcare sector. HHS announced at COP 27 that the pledge had been signed by over 100 healthcare organizations, including hospitals, suppliers, insurance companies, and pharmaceutical companies. Recognizing that the high emissions of the healthcare sector (estimated to account for 8.5% of overall U.S. emissions) are tied to the footprint of the industry’s supply chain, HHS also announced a collaboration with the National Health Service (NHS) of England to align on procurement requirements.
To learn more about how Gilmartin strategically partners with our clients, please contact our team today.
Authored by: Matt Berner, Managing Director, ESG & Patrick Smith, Associate, ESG