Why is health being ignored in ESG investing?
What’s happening? ShareAction has developed a framework to help investors measure the impact of their portfolios on health. The framework mirrors the Scope 1, 2 and 3 emissions system, and looks at how companies can influence the health of workers, consumers and communities. For communities, the framework evaluates how issues such as air pollution and antimicrobial resistance are addressed. The organisation, having interviewed 30 asset managers, reported that most had not prioritised health or divested from sectors such as tobacco and alcohol. ShareAction has said investors should ensure health is a key means to assess company sustainability. (ShareAction, Bloomberg)
Why does this matter? Improving health can bring economic benefits to society and investors. A study by McKinsey found that a healthier population could add $12tn to global GDP by 2040. Another study found health has contributed to income growth at almost the same level as education. In 2018, research showed around one-third of all deaths can be linked to the overconsumption of certain products made by commercial entities, such as alcohol, tobacco and certain food and drink offerings.
Investors ignore health – ShareAction surveyed a group of managers on what proportion of their assets are in funds with health-relevant exclusions. It found that around 50% of funds – equivalent to €1.8tn ($2.09tn) of capital – is available to tobacco manufacturers, and even more is available to alcohol producers. According to ShareAction, the group surveyed was a small sample of progressive asset managers and it’s likely other asset managers have larger proportions of capital available to these sectors.
Are ESG ratings the issue? Part of the reason for investors ignoring the health risks their portfolios face could be because of ESG ratings. The requirements for companies to disclose on health lags environmental disclosure requirements, making it difficult for ESG data providers to offer accurate ratings. ESG scores have historically not covered health accurately, for example, in March 2021 British American Tobacco was rated as the third-highest ESG performer in the FTSE 100 by Refinitiv.
Steps in the right direction – There has been a growing interest among some savers to invest while considering health. A survey of UK public savers found that their top sustainability goal of interest was improving health. This could be an opportunity for asset managers to use their investments to contribute to a healthier society and some have started to do so. In June 2021, Legal & General formed a partnership with Sir Michael Marmot from the University College of London Institute of Health Equity to address UK health inequality.
How does health link with the environment? Pillar 3 of the ShareAction framework relates to how firms can influence the health of communities via their influence on the environments in which they operate. This includes the effects of pollution from business activities. For instance, a study in February 2021 found that if the UK introduced policies in line with the Paris Agreement almost 98,000 lives could be saved through greener, healthier diets, as well as 3,000 lives from improved air quality and 21,000 lives via active travel. Another example can be seen in an paper in The Lancet Planetary Health which found that tens of thousands of premature deaths could be prevented every year if cities achieve World Health Organization recommendations regarding residential proximity to green space.