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 U.S. companies wait for the SEC to issue its final climate-related disclosure rule, California is moving forward with its own set of corporate climate disclosure legislation. At the end of May, the California state Senate passed two bills that, if adopted by the state Assembly, would be more stringent than the SEC’s proposal. One piece of legislation would require companies that do business in California and have at least $1 billion in revenue to annually report their Scope 1, Scope 2, and Scope 3 greenhouse gas (GHG) emissions. If you are unfamiliar with greenhouse gas emissions accounting terminology, please refer to our recent blog post. The other bill would require companies that do business in California and have at least $500 million in revenue to prepare annual climate-related financial risk reports.
Unlike the SEC’s rule, the California bills would require both public and private companies to comply. Moreover, California would require all reporting entities to obtain independent verification of its disclosures by a third-party auditor.
Although the SEC originally planned to make its proposed rule effective by the end of 2022, pushback from companies and the risk of lawsuits has cause the Commission to delay and potentially soften its final rule. However, California’s stricter legislation could thwart the SEC’s efforts to ease the disclosure requirements it originally proposed as many companies would have to comply with California’s higher standards if adopted.
A recent survey from Deloitte asked hundreds executives across 6 industries, including life sciences and healthcare, about how they are preparing for and responding to increased ESG disclosure expectations. According to the survey, life sciences and healthcare executives believe that the “top anticipated benefit” of enhanced ESG reporting is to help attract and retain talent. 52% of these life sciences and healthcare companies assigned management responsibility for ESG to a dedicated Chief Sustainability Officer, while 71% were “preparing extensively” for increased ESG disclosure requirements.
In The Weeds
Charles River Laboratories has come under recent scrutiny from animal rights organizations and regulators for the importation and use of non-human primates to conduct animal studies. The company relies heavily on importing an endangered species of monkey from Southeast Asia – long-tailed macaques – to conduct its research. The animal is commonly used for studies across the biomedical research industry, but in mid-2022, the International Union for Conservation of Nature (IUCN), which compiles the Red List of Threatened Species, identified the laboratory experimentation market as one of the main threats facing the species.
In late 2022, several wildlife officials from Cambodia, where a significant portion of the monkeys originate from, were indicted by the U.S. Department of Justice for allegedly helping to catch long-tailed macaques in the wild and exporting them with false labels stating that they were bred in captivity. In February 2023, the DOJ subpoenaed Charles River Labs as part of its investigation into the macaque smuggling ring, after which the company voluntarily suspended shipments of non-human primates from Cambodia.
Although Charles River’s animal research policies follow a number of best practices and industry-leading frameworks for the responsible treatment of animals in science, PETA submitted a shareholder proposal requesting that the company publish a report providing more extensive information about imported non-human primates. This proposal was rejected by shareholders at the annual meeting, but the issue will still cast a shadow over Charles River for the rest of the year. The company announced that it expects non-human primate supply constraints to reduce their 2023 consolidated revenue growth forecast by 200 to 400 basis points.
A Note on ESG Investing
Just days before the California state Senate passed the pair of climate disclosure bills, it approved a separate bill that would require the state’s largest pension funds, CalPERS and CalSTRS, to divest from the 200 largest publicly-traded fossil fuel companies by 2031. In an interview shortly before the bill was passed by the state Senate, CalPERS CEO Marcie Frost said that while she remains a strong proponent of incorporating ESG principles into the fund’s investing decisions, she was strongly opposed to the divestment bill.
According to Frost, divestment would prevent the fund from being able to influence oil and gas companies to be more transparent and support the transition to cleaner energy. A recent feature from Bloomberg revealed how certain European companies are divesting from carbon-intensive assets and claiming emissions reductions, which allows less ESG-minded investors to scoop up these assets yet do nothing to reduce their actual emissions.
To learn more about how Gilmartin strategically partners with our clients, please contact our team today.
Authored by: Patrick Smith, ESG, Gilmartin Group