(Wednesday 29th September, London) The failure by investors to mitigate corporate impacts on human health is leading to growing financial risks, according to a new report from responsible investment NGO ShareAction.
Health is a risk that investors cannot diversify away from
Even before the pandemic, health outcomes were stagnating across the developed world. In the UK, improvements in life expectancy stalled over the last decade and declined in the poorest groups. In the US, life expectancy has been in decline since 2014.
This affects the returns of diversified portfolios. Like climate change, it creates systemic risk that investors cannot diversify away from. The CBI estimates that poor health costs the UK around £300bn annually in lost economic output, in addition to direct health costs.
Yet health represents a blind spot for investors
ShareAction’s research, funded by The Health Foundation, found that asset managers’ risk assessments tend to focus on short-term and company-level risks rather than those at a portfolio level. This limits their ability to assess how the negative external health impacts of one company in their portfolio may have negative financial consequences on another part of their portfolio, or how longer term risks such as from regulatory changes may affect their investments.
In interviews and survey responses from asset managers, ShareAction also found that investors tend not to recognise the role of companies in influencing health outcomes, rather seeing it as an issue for governments and personal responsibility. Where they did assess the role of companies, they tended to focus too narrowly on healthcare and pharmaceutical companies, neglecting the crucial role of other companies in shaping people’s health.
A new framework for understanding corporate health impacts
To address these misunderstandings, ShareAction has created a new framework to help investors understand the impact of their portfolios on health. Echoing the Scope 1, 2 and 3 framework for corporate climate reporting and based on extensive independent research, ShareAction reports that companies can influence the health of:
- Workers, through the provision of secure work with adequate pay, and through workplace health practices. Key sectors here include essential retail, delivery and logistics, construction, facilities management, social care, warehousing, and food production.
- Consumers, through the goods and services they produce and market. Key sectors include tobacco, alcohol, and food and beverages.
- Communities, through their effects on the built environment, air quality and anti-microbial resistance. Key sectors include construction, property development, transport and agriculture.
The report states that as much as 80% of health outcomes are driven by these environmental factors – a fact to which policymakers are increasingly responding. Air quality regulations and restrictions on unhealthy foods are on the rise, with 42 countries having introduced sugar taxes - more than have implemented carbon taxes.
This growing regulation is beginning to internalise the previously external costs of corporate impacts on health, making investor action more urgent. It's for these reasons that ShareAction is calling on data providers to do better in incorporating health-relevant metrics into their sustainability indexes.
Savers, too, increasingly want their savings to serve good health. A survey of UK public savers found that improving health was the top Social Development Goal (SDG) of interest, with 70 per cent saying this goal was important to them. Another survey found that 33% of pension savers want their pensions to be divested from companies that undermine health by not paying the living wage.
Asset owners are waking up to the need for action on health
Asset owners are waking up to this demand. Most asset owners surveyed by ShareAction said improving health was a ‘clear priority’ or ‘area of focus’ for them – and that this has increased since the Covid-19 pandemic. Two-thirds of them said they weren’t aware of options to invest in funds delivering positive health impact and three-quarters said they receive minimal or no information from their fund managers on stewardship in relation to health. Forty-two percent reported that they were “unsatisfied” or “very unsatisfied” with the information they receive on this topic. As such there is a market opportunity for funds focussed on driving better health impacts.
This will require much better health analysis from ESG data providers, who currently fail to cover health topics effectively. As these providers tend to compare companies with their sectoral peers, key health-damaging sectors (such as tobacco producers, or manufacturers of ultra-processed foods) continue to score highly. For example, British American Tobacco was recently rated by one leading data provider as having the third highest ESG rating in the FTSE 100.
As a result of these data limitations, and investors’ approach to assessing risk, vast amounts of capital remains available to health-damaging industries. ShareAction’s survey showed that just 12 per cent of capital was covered by alcohol exclusions, for example.
New collaborative engagements proposed
However, the inclusion of such companies within investors’ holdings does present an opportunity for greater stewardship activity to help shift companies away from negative impacts and toward more sustainable business models.
In particular, ShareAction argues that investors are more likely to engage on health-related topics covered by collaborative engagements. As such, they are calling for investors to build on and expand collaborative engagements in relation to nutrition and workplace health.
ShareAction also proposes the creation of new collaborative initiatives on air quality and the alcohol industry. It has established a new programme of work – Long-term investors in people’s health – with the aim of establishing collaborative engagements on these topics and supporting the investment sector to embed health within their stewardship approach.
John Godfrey, Corporate Affairs Director at Legal and General, said:
“Asset managers are seeing the first salvoes of campaigns to place health among the key issues for ESG investing and will need to respond. The lessons of climate – with which there are multiple parallels and overlaps – are that this could be a movement that will evolve quickly in a post-COVID world where public health and health inequality is more important than ever before.”
Kieron Boyle, Chief Executive of Guy’s and St Thomas’ Foundation and Chair of the Steering Group for this research, said:
“Together with the Health Foundation, we are supporting ShareAction to develop a new focus on health by institutional investors. The pandemic has shown just how important health is for resilient economies, and this report clearly articulates the role asset owners can play in driving that. Our hope is that more investors will see health as a critical lens for business performance.”
Jessica Attard, Head of Health at ShareAction, said:
“The pandemic has bought into sharp focus the impact our collective health can have on economic prosperity. Good health is an economic asset that investors can no longer afford to ignore. Our research has shown this is a big opportunity space with both a social and financial up-side, especially for those asset managers who act first to fill the void. We’re calling on all investors to rapidly review their Responsible Investment policies to ensure health is a key lens through which they assess company sustainability.”