Gilmartin ESG Newsletter | July 24, 2023

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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

As the dust settles after proxy season, the voting records of leading European institutional investors reveal that they are leveraging director elections to exert more pressure on companies to improve their ESG performance. BNP Paribas Asset Management (BNPP AM) announced that it rejected 48% of all director appointment resolutions. BNPP AM opposed the election of all male directors in instances where a company did not meet the firm’s board diversity requirements. Likewise, Amundi, Europe’s largest asset manager, announced that it opposed the re-election of more than 500 directors at 84 companies in the Energies & Utilities sectors alone due to concerns about their climate strategies.

However, BNPP AM and Amundi’s voting records diverge with respect to climate-related shareholder resolutions. Amundi supported 88% of these proposals, viewing these resolutions as an “effective mechanism to push for positive change and improved transparency on issuers’ energy transition path.” By contrast, BNPP AM rejected 53% of “Say-on-Climate” resolutions. This does not mean that BNPP AM places any less emphasis on climate issues – the firm expects companies to achieve net-zero emissions by 2050 with “credible decarbonization strategies and intermediate targets” in place.

A Note on ESG Ratings

A company’s ESG rating is arguably the most visible indicator of its overall ESG performance, yet ESG ratings firms have come under fire over the last year for using different scoring methodologies, resulting in a lack of correlation between their ratings. Analyzing 400 companies across 24 different industries, the CFA Institute found that ESG scores from MSCI, one of the leading firms in the space, were only 35% correlated with ESG scores from Sustainalytics, another prominent rater. By contrast, credit ratings from S&P, Moody’s, and Fitch for the same set of companies showed correlations between 94%-96%.

In a survey conducted by the European Commission last year, over 80% of respondents said that the ESG ratings market was not functioning well, and the same number supported legislative intervention by the EU to improve transparency about the ratings firms’ methodologies. Last month, the EU announced new rules for the ESG ratings industry, which was largely unregulated previously, that require firms to publish their methodologies. Moreover, the EU aims to crack down on ratings firms that provide consulting and benchmarking services alongside their ratings, which present potential conflicts of interest. The EU’s proposed rules include several exceptions, including private ESG ratings that are not intended for public disclosure or distribution.

The Healthcare View

While companies and investors often view greenhouse gas emissions as the foremost environmental issue, the “E” in ESG encompasses a broader range of topics, such as biodiversity, water consumption, and the physical impacts of severe weather events. Most environmental topics are long-term, progressive issues, but severe weather events can have short-term, high magnitude impacts on a company’s operations and financial performance.

Last week, a tornado damaged one of Pfizer’s manufacturing facilities in North Carolina, where approximately 25% of the company’s sterile injectable medications (e.g. anesthesia, anti-infectives, and neuromuscular blockers) are produced. Although Pfizer announced that they are working to identify new raw material sources and alternative manufacturing locations, their initial assessment did not find major damage to the medicine production areas of the facility.

However, it remains to be seen how the tornado will affect not only Pfizer’s supply chain, but also the U.S. healthcare system at large. Pfizer estimates that the facility accounts for approximately 8% of all the sterile injectables used in U.S. hospitals, leading some experts to fear a shortage of essential medicines. According to U.S. Pharmacopeia, half of the drugs produced at the facility are on the FDA’s list of essential medicines, and many of these products were already in limited supply before the tornado. 

In The Weeds

Following the publication of the International Sustainability Standards Board’s (ISSB) sustainability disclosure framework, ISSB announced that it will be taking on responsibility for monitoring the progress of corporate climate disclosures from the Task Force on Climate-related Financial Disclosures (TCFD). While the TCFD has historically been the premier climate-related disclosure framework and has been widely adopted by companies around the world, ISSB was created to help consolidate existing ESG disclosure standards into one global baseline. The new ISSB standards fully incorporate the TCFD standards and aim to build upon the industry-specific disclosure frameworks previously established by the Sustainability Accounting Standards Board (SASB).

Simply put, aligning ESG disclosures with both the TCFD and SASB standards will largely fulfill the new ISSB disclosure requirements.

To learn more about how Gilmartin strategically partners with our clients, please contact our team today.

Authored by: Patrick Smith, ESG, Gilmartin Group & Tamsin Stringer, ESG, Gilmartin Group

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