Kay Eichhorn-Schott, portfolio manager at Berenberg
Healthcare is one of the most critical sectors to invest in for global wellbeing, but healthcare companies are subject to a fair few ESG controversies, often instigated by ESG rating agencies.
Rating agencies do a valuable job but there are also problems with using the ratings from an investor's perspective. Agencies' ratings are not uniform due to the different methodologies and KPIs used.
The level of transparency and detail of reporting can vary a lot between companies, limiting comparability. Furthermore, most rating agencies leave aside the critical question of impact: how companies improve everyone's lives. Investors need to go one-step further than just looking at a rating when choosing where to invest in healthcare.
The main ESG risks in healthcare revolve around litigation and product safety. Medication does not work for every patient and there can be side effects. Recalls of medical devices are also not uncommon and can lead to controversies.
In the context of environmental concerns, emissions reporting in healthcare does often lag behind other sectors. Investors need to take all of this into account but also take care they do not get swamped by it. You still need to ask simple questions like how much good a company is doing.
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There are a few different ways healthcare companies can have impact that do not show up on traditional ESG ratings. One thing to look for is a company that ‘puts its neck out', so to speak and develops a new clinical product to address a societal problem that may not be thought of as a medical issue.
Obesity is a good example. Companies like Novo Nordisk and Eli Lilly are investing in drug therapies to combat obesity: currently only 2% of obese people are treated with anti-obesity medication even though 40% of US adults over the age of 20 are obese.
Novo Nordisk and Eli Lilly are of course trying to make a profit but they are still taking a risk in developing a medical solution to a problem most people, including most doctors - who will have to recommend the drugs, do not really consider a medical issue. In fact, obesity is associated with more than 200 possible health complications.
While obesity medication is not free, better therapies for the disease can actually lead to cost savings for healthcare systems down the line. As a result, these innovative companies are making a very significant material contribution to global wellbeing.
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A second way to think about impact is to look at the companies with a history of making efforts to ensure their products are cheap and accessible in the developing world. Companies like AstraZeneca, for example, do not enforce patents in the least developed countries, low-income countries, and a subset of lower-middle income countries.
Pharmaceutical companies also run various programmes with governments and non-profit organisations to improve access to medicines. AstraZeneca has provided support for more than 30m people and plans to reach 50m by the end of 2025. The company has also donated products worth $2.4bn and trained more than 124,000 healthcare workers. During the Covid-19 pandemic, the company's vaccine contributed significantly to the fight against the pandemic. In 2021, AstraZeneca provided about 2.5bn doses to more than 180 countries.
Given the substantial price discount to other COVID vaccines, AstraZeneca made a strong impact in emerging markets as the product was priced at a very significant discount to other available vaccines. The company pledged to make the product available to governments without making a profit on it and continued its efforts despite the Western public and shareholders not giving it any credit for it.
Lastly, a company's environmental footprint is always something else to look out for. The sector as a whole does not always do well here. However, technological progress can make a big contribution in this context.
One prominent example is the use of single-use bioreactors for the production of biological drugs by companies like Sartorius, a German based pharmaceutical and laboratory equipment supplier, or American Danaher, which are able to reduce energy costs by about 60% and water consumption by 70% versus traditional manufacturing equipment, like stainless steel tanks.
While such throw-away products also create waste, the risk of cross-contamination is reduced, product safety improved and no detergents have to be used. By employing such environmentally friendly techniques, these companies can also generate significant cost savings. Besides lower operating costs, construction costs also decline by about 30%.
As an investor in healthcare you sometimes have to sit back and focus on the wood not the trees to come to a judgment about who is doing the most to enhance human wellbeing.
Kay Eichhorn-Schott is a portfolio manager at Berenberg
