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Can a Massive Conglomerate Be ESG-Friendly?

Danaher has never been anything other than a conglomerate. In the corporation’s oft-cited conception story, two brothers came up with the beginnings of a business plan while on a fishing trip to Montana’s Danaher River. Their big idea? Acquiring companies that were underperforming, but still had high potential because of their brand, innovative reputation, strong market share or extensive distribution channels. Post-acquisition, Danaher would apply its philosophy of continuous improvement to help turn the companies around.

Within two years of its inception in 1984, Danaher had become a Fortune 500 Company; within 10 years its revenues topped $1 billion. To date, the company has made some 40 acquisitions, spinning off another conglomerate, Fortive, in the process. Danaher today is comprised of three business segments: Environmental and Applied Solutions, Life Sciences, and Diagnostics, and holds more than 25 companies, making it one of the largest conglomerates in the world by market capitalization.

But with such scale come real questions about how well a conglomerate⁠—by definition made up of many different entities, with their own management and goals⁠—can deliver on social and environmental factors. A first look at Danaher is encouraging. Several of the company’s businesses in its Environmental and Applied Solutions segment address water security through their products, including Trojan Technologies’ water treatment focus, Aquatic Informatics’ water data management platform (used by the USGS and other water operators), and ocean and weather measurement sensors made by Sea-Bird Scientific and OTT HydroMet. Subsidiaries Hach and ChemTreat also make products that help industrial customers conserve water and treat wastewater, to reduce the discharge of harmful pollutants.

In addition to its environmentally beneficial products, Danaher reports detailed workforce diversity statistics, and says that in 2020 it achieved pay equity for women globally, and for racial and ethnic minorities in the US. The company has clear goals for improving its workforce diversity, and goals for reducing its carbon emissions, energy use and waste as well.

Upon closer inspection, however, Danaher’s environmental and social goals seem less ambitious than they could be. The company’s targeted 15% reduction in energy use and greenhouse gas emissions by 2024 is significantly more modest than the targets of competitors who are mapping longer-term pathways to net zero emissions. According to MSCI, Danaher’s targets imply a relatively high 2.1 C temperature rise, compared to the Science-Based Target Initiative best practice of 1.5 C. Danaher also does not provide outside assurance for its emissions data, which may be a factor in its “D” rating from CDP. Similarly, Danaher’s pay equity achievement includes only base pay, excluding other forms of compensation such as discretionary bonuses (which are often a culprit in gender and racial pay disparities). And while the company’s workforce diversity disclosure and goal-setting are to be commended, its 2025 goals for global gender diversity and US racial and ethnic diversity include relatively modest 4% increases from its 2018 diversity profile⁠—with no progress shown as of 2020.

All of which raises a question: is the company’s conglomerate structure to blame? As a corporation that is famously attentive to investors, it would seem reasonable to expect Danaher to be out in front of competitors in terms of environmental and social factors. But for the most part, those competitors have much more narrow, focused business models, without the unique challenges that managing such a large holding company represent. Perhaps the additional layers of management and coordination create too many obstacles to social and environmental ambition, limiting the scope of progress.

In one area, however, we see reason to hope that the conglomerate form may not preclude coordinated social or environmental progress. When the COVID-19 pandemic hit, Danaher subsidiary Beckman Coulter (acquired in 2011) launched one of the first COVID-19 antigen tests considered to be high-quality (93% positive percent agreement and 100% negative percent agreement), with the “volume, workflow, and flexible scalability to fight the Covid-19 pandemic.” Integrated DNA Technologies, acquired in 2018, was the first US company to receive clearance from the CDC for its primer and probe kits, both key elements of COVID-19 testing. And Cepheid, acquired by Danaher in 2016, developed one of the first rapid molecular diagnostic Covid tests, Xpert Xpress, in early 2020. That test went on to receive Emergency Use Authorization from the FDA, and in Q4 2020, Cepheid shipped approximately 9 million tests.

When confronted with a major global challenge, therefore, Danaher was clearly able to mount a coordinated, effective response. As activist investors, our hope is that we can help push one of the world’s largest conglomerates to apply this experience, with equal energy, to climate change, workforce representation, and other, no less urgent global challenges as well.