Public health and development may find an unexpected ally in financial capital markets, which can be further leveraged toward impact through the nascent but growing field of environmental, social and governance investing — the emerging criteria for impact investments also known as ESG.
In the past decade, there has been a marked shift in investor strategy and philosophy regarding the role and value of impact investing in the broader financial services sector. In the past, impact investing practices were thought to be appropriate only for niche allocations, and utilized to drive marketing and public relations efforts rather than a primary driver of financial return. Now, multiple studies and meta-analyses have concluded that ESG is not a driver of concessional returns, but rather correlates with financial performance and is critical to managing risk.
More than $8.7 trillion in assets under management are being managed by impact strategies, accounting for nearly one in five dollars under professional management in the United States. As ESG portfolios are accounting for a greater share of total AUM, it is increasingly relevant to scrutinize both process and metrics surrounding ESG investing.
Aside from a lack of basic standardization in terms of what it means to be ESG aligned, there are key verticals that seemed to be ignored entirely. For example, health metrics are grossly underrepresented in integrated reporting platforms, but have been demonstrated to be fundamental drivers of social and financial return.
From a social value standpoint, corporations are one of the greatest levers to affect outcomes on a global scale in health. For example the retail, food and beverage, and alcohol industries have a consumer reach of nearly two-thirds of the global population. PepsiCo Inc. alone has a consumer reach of 3 billion people, with a significant portion coming from low- and middle-income countries such as China, Mexico, Brazil, South Africa and India. This is a giant lever to impact health outcomes as incremental modifications in the salt, sugar,and saturated fat contents of products consumed by billions globally has the tremendous potential to improve health.
Considering financial return, there is a growing body of evidence supporting the role of corporate reporting on workplace health and wellness. Of course the risks are well known from a macroeconomic perspective. The World Economic Forum’s Global Risk Report has stated that noncommunicable diseases pose one of the greatest threats to the global economy. The economic loss associated with the deaths from NCDs between 2010 and 2030 is estimated to be $63 trillion, with 75 percent of these deaths in low- and middle-income countries. Naturally, this financial risk is shouldered by employers. Increasingly, evidence suggests that employee health is linked to productivity, morale and retention. As such, investments in employee health are strongly correlated with a company’s bottom line. Studies have repeatedly demonstrated that the financial performance of companies that prioritize workplace health and safety consistently outperformed the S&P average by 7 to 16 percent per year.
Standardizing and reporting on health metrics offers the prospect to not only quantify, but also to optimize social and financial return. Implicit in the rise of ESG is a growing consensus among corporations and asset managers that nonfinancial indicators are material in the financial performance of a company. However, currently, leading reporting platforms such as the Dow Jones Sustainability Index, the FTSE4Good index, the Global Reporting Initiative and the International Integrated Reporting Council either do not adequately include health or limit health reporting to traditional occupational health and safety metrics.
To fully capture its financial and social value, health should be incorporated into reporting platforms in two key ways.
First, metrics — such as reporting on employee health and well-being — chronic disease prevention and health promotion programs should be included in corporate reporting structures such as 10-K and annual reports. Many companies provide a narrative report on overall health care costs and the existence of workplace health programs. Employee health needs to shift from being considered a cost to being viewed as an investment in workforce productivity and retention. When these health metrics are tracked by ESG investors, market leaders will be rewarded, which will serve as a positive feedback loop for companies to prioritize workplace health initiatives.
Second, businesses that impact health, such as those in the food and beverage industry, should report on metrics such as the profits earned through the sale of healthy food and research and development spent on healthy products. Only after health metrics are comprehensively reported across a company’s value chain can it be optimized as a part of a core business strategy. This standardization and transparency is particularly important in LMICs — which often have the most lax regulations around sourcing — and stand the most to gain from nutritional improvements to supply chains. This applies to commodities such as trans fats, which are being phased out of the U.S. by the Food and Drug Administration, but are largely unregulated in developing economies.
While it might have been counterintuitive from a business perspective for a retail brand to take an ESG approach, it pays off. In 2014, CVS took a progressive stance by prohibiting the sale of tobacco, even though these products earned the company $2 billion in annual revenues. Despite the initial drop in sales, CVS noted an overall 10 percent increase in revenues in 2014. The market responded favorably, with a 66 percent rise in its stock price noted two years after the tobacco-free announcement. Think of the market and social impact this could have in LMICs, home to 80 percent of the world’s 1 billion smokers.
Industry trends suggest that ESG will be an increasingly growing part of the financial services landscape. To fully optimize both the financial and social value of a business, health metrics need to be not only tracked, but also incorporated into integrated reporting platforms. This evolution is likely inevitable, because in the end, it’s just good business.
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