Investing in healthcare – a sector for responsible investors to consider?

Healthcare is a key sector for responsible investors to consider as healthy populations reap lots of benefits for society. Good health is central to human happiness. It encourages a productive lifestyle and contributes to extended life expectancies, prosperity, and economic progress.

Not to mention this sector gives investors the opportunity to support goal three of the UN’s Sustainable Development Goals – “Ensure healthy lives and promote well-being for all at all ages”.

The healthcare sector certainly hasn’t escaped the attention of fund managers. The sustainable funds in the IA Global sector have an average of 16% invested here.

Considering environmental, social and governance (ESG) factors when you invest can help you understand the risks, as well as the opportunities of investing in a company, and even an entire sector.

We look at the key ESG factors to consider when investing in healthcare, and share two investments that are integrating ESG well.

This article is not personal advice. As always, if you’re not sure about an investment decision, seek advice. All investments fall as well as rise in value, so you could get back less than you invest.

Environmental

Only about one in five companies in the healthcare sector have any kind of emissions-reduction target. This leaves them vulnerable to unassessed climate risks, as well as regulatory risk if worldwide governments feel the need to compel companies to take action to curb their emissions. The worst emitters could also see a significant profit hit if universal carbon taxes are introduced.

Climate change is at the forefront of the global agenda and investors should make sure their portfolio is on the right side of the green transition. Companies or funds that aren’t working towards net-zero targets or carrying out climate risk assessments face potential regulatory, reputational and financial risks.

Social

Investing in the healthcare sector allows investors to achieve real world impact. From funding the distribution of critical vaccinations, to supporting key research into diseases like cancer, as well as financing the development of tools and medicines that can improve whole communities’ quality of life.

Here are three main potential risk areas investors should take into account when investing in healthcare:

1. Universal access to healthcare

The links between inequality and health are well known. Those living in poverty are less likely to have access to, or be able to afford, medical care and subsequently are more likely to experience ill health. Ill health itself is a major cause of poverty, and the cycle continues.

The price barriers healthcare companies impose can enable the unjust distribution of medicines and vaccinations. This is something responsible investors should consider.

AstraZeneca is a good example of a business championing universal access to healthcare. In emerging markets, the Covid-19 vaccination 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.

2. Antimicrobial resistance (AMR)

Antibiotics are the backbone of our health infrastructure and tools that enable modern healthcare. Yet antibiotics are becoming less and less effective. A key cause of this is the use of antibiotics in the agriculture sector to increase efficiency and drive profit margins. In fact, two-thirds of antibiotics produced globally are used to treat and prevent disease in farm animals, which then make their way into our food chain.

AMR is one of the biggest threats to public health globally, with studies estimating that it could cost the world as much as $100 trillion by 2050.

This is a systemic risk for the healthcare system as a whole, so it’s important investors take it into account.

3. Animal testing

Animal testing is a divisive topic. Some argue it can lead to medical discoveries that save and improve human lives. Others believe it can't be justified under any circumstances.

Those in the latter camp can look for companies that are cruelty-free certified or approved (for example from PETA). This means they don’t support, cause, or contribute to animal exploitation and suffering.

For fund investors, animal welfare is often included in the values-based investment criteria applied by exclusions-based fund managers. For example, the Aegon Ethical Equity fund, which features on our Wealth Shortlist, avoids companies that provide animal testing services or manufacture or sell animal-tested cosmetics, household products or pharmaceuticals.

Governance

The healthcare industry has had a history of lobbying issues. US healthcare company Purdue Pharma for instance, used hyper-aggressive marketing, lobbying of Congress and the Food and Drug Administration, and a host of false premises around the high-strength painkiller OxyContin. While this led the company to make billions of dollars, it was at the expense of an epidemic of opioid addictions and overdoses.

Poor governance, anticompetitive behaviour, and corruption stem from inadequate oversight. Investors can assess how robust a company’s governance is by reading company reports and consulting third party risk ratings, like those produced by Sustainalytics.

More on how to assess a company’s ESG credentials

ESG in action – two case studies

Royal London Sustainable Leaders Trust

Fund manager Mike Fox invests in UK companies that contribute positively to the environment and society, and align with a range of sustainable themes, including next generation medicine and hygiene and wellbeing.

Sectors that don’t provide a clear benefit to the environment and society, like tobacco producers, are excluded.

Alongside strong sustainability-related characteristics, Fox also looks for companies with strong financials and a solid management team, that are attractively valued.

The fund's top holding is AstraZeneca, one of the world’s largest pharmaceutical companies. The manager sees the company’s main ESG opportunity coming from its drive to bring cutting-edge scientific research from the laboratory into medicines which can help save and transform people’s lives. Its scientists are working on drugs which improve targeting of a disease within the body, or work with our immune system to fight cancerous tumours.

The manager believes AstraZeneca is an ESG leader within its own operations too. It’s recently improved the diversity of its management and set an ambitious net-zero goal for 2025.

No company is without ESG risks though, and AstraZeneca is no different. The manager thinks the company’s biggest ESG risk comes down to who can access the treatments it produces.

The company offers a four-tier pricing structure that offers medicines more cheaply in emerging markets and donations through patient assistance programmes. But he believes pressure on pricing could continue to impact the business in most countries it operates in.

The fund manager tends to invest in smaller companies, which adds risks. The fund also invests in fewer companies which adds risk.

Worldwide Healthcare Trust

Worldwide Healthcare Trust aims to grow your money over the long term by investing in companies in the global healthcare sector. This includes pharmaceutical and biotechnology companies.

Typically, they possess favourable traits like being financially strong, having underappreciated products in development or a high-quality management team. These can be found in both higher-risk early-stage companies and larger, more established worldwide ones.

The team behind this trust believes companies that act responsibly tend to be more successful at delivering long-term shareholder value. That’s why they consider ESG factors when evaluating a potential investment.

The portfolio is also screened on a quarterly basis for new ESG issues, and these are discussed among the team. If necessary, the team will engage with the companies they invest in to bring about changes in their behaviour or policies.

The team recently engaged with Horizon Therapeutics and provided feedback and recommendations on specific topics like talent management, disclosure and governance benchmarks.

Through these engagements, the team was made aware of the ‘Energize’ programme – a collaborative programme launched by ten pharmaceutical companies to increase access to renewable electricity for global pharmaceutical supply chains.

Investors should note that closed-ended funds can trade at a discount or premium to net asset value (NAV). Investing in a trust focused on a single sector is a higher-risk approach, so it should only form a small part of a portfolio. The team’s flexibility to invest in emerging markets, derivatives and use gearing adds further risk.

2 fund ideas for a climate-ready portfolio

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