Welcome to the latest edition of Gilmartin Group’s ESG newsletter. 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
Earlier this month, the U.S. Securities and Exchange Commission (SEC) issued a defense of its new climate reporting rule, insisting that climate-related disclosure is necessary for investors to make informed decisions.
In March, the SEC introduced new regulations requiring public companies to disclose their climate-related risks, the financial impacts of severe weather events, and, in certain cases, greenhouse gas emissions from their operations. The climate disclosure rule faced swift opposition, with multiple legal challenges filed within days of its release, including lawsuits from Republican state attorneys general and business groups that argued the requirements are too burdensome for companies and go beyond the SEC’s regulatory authority. The petitions were sent to the US Court of Appeals for the Eighth Circuit, and the SEC announced in April that it would pause the implementation of the climate disclosure rule.
In its defense, the SEC claimed that “Congress granted the Commission authority to require disclosure of information important to investors’ investment and voting decisions,” and that “each disclosure requirement in the Rules is designed to elicit information that is important to informed investment and voting decisions.” The SEC also continued to emphasize high investor demand for more consistent and comparable climate information and addressed cost concerns associated with disclosure.
The Healthcare View
Sustainalytics, a prominent ESG ratings agency and a subsidiary of Morningstar, recently provided an ESG perspective on GLP-1 Medications for cosmetic weight loss and diabetes, highlighting relevant ESG topics for the emerging class of drugs.
GLP-1 medications, which are designed to mimic hormones released in the stomach after food intake, have historically been used to treat type 2 diabetes. However, their effectiveness in promoting weight reduction has led to a dramatic increase in off-label use in the past few years. Sustainalytics ranks “product governance, covering potential safety risks for patients” and “access to basic services, covering accessibility and affordability issues” as the top two ESG risks to consider for companies involved with GLP-1s.
Patients who take GLP-1s for off-label uses, such as cosmetic weight loss, might be less tolerant of side effects and more likely to pursue legal action, which could increase liability risks for manufacturers. At the same time, the growing demand for weight loss applications has led to limited availability of GLP-1s for type 2 diabetes patients, forcing them to ration their treatments or seek alternatives. These shortages pose an ESG risk, as they will continue to cause interruptions in supply, affecting the health of diabetes patients.
As many more weight-loss treatments come to market, investors will have to navigate the ESG challenges associated with the off-label use of these new medications.
A Note on ESG Ratings Legislation
The UK will be introducing legislation to regulate ESG ratings providers in 2025, as confirmed by the UK’s Finance Minister Rachel Reeves.
In November 2021, the International Organization of Securities Commissions (IOSCO) called on regulators to enhance transparency and oversight in the ESG ratings sector, pushing raters to identify and disclose potential conflicts of interest, as well as their methodologies. Building off this momentum, the UK’s new legislation will align with IOSCO’s recommendations and place ESG ratings providers under the supervision of the Financial Conduct Authority (FCA).
In response to the new legislation, UK Sustainable Investment and Finance Association (UKSIF) CEO James Alexander stated:
“A lack of clarity and transparency around some ESG ratings, where providers can sometimes come out with vastly different ratings of the same business, have caused confusion by not clearly outlining the methodologies used. This regulation should help open the black box on these sorts of judgments, not by forcing agreement or consensus, but by shining a light on how the underlying data is gathered and how ratings are calculated.”
In The Weeds
This week, a US federal court ruled against new regulations in Missouri that sought to restrict financial professionals from incorporating ESG considerations into their investment decisions.
In 2023, Missouri Secretary of State Jay Ashcroft introduced a regulation requiring financial advisors to obtain written client approval before considering environmental, social, or governance (ESG) factors in investment recommendations. In the law, the written consent also needs to include mandatory language affirming that the investment advice “will result in investments and recommendations that are not solely focused on maximizing a financial return.”
The Securities Industry and Financial Markets Association (SIFMA) filed a lawsuit against Missouri’s new regulations, arguing that the broad definition of “nonfinancial objectives” could inadvertently include standard financial considerations like tax considerations, liquidity, and diversification.
In the decision, Judge Stephen Bough ruled the regulations were “unconstitutionally vague” and issued a statewide permanent injunction, citing concerns over the harsh penalties for non-compliance and the lack of clarity in the rules’ language.
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Authored by: Tamsin Stringer, ESG, Gilmartin Group & Patrick Smith, ESG, Gilmartin Group