Why We Need to Add Health to ESG

Over the past two decades, ESG investing has made its way into the mainstream, but it is still largely focused on the “E” for environmental factors — more than $4 trillion of assets now use climate change and carbon footprint as criteria for investment decisions. Meanwhile, the “S” or social component of ESG has remained underdeveloped, partly because it is hard to measure.

I’d like to suggest that health is the new frontier for ethical and sustainable business.

Within this category, health remains low profile, so investors’ and companies’ treatment of health issues is today broadly where climate change was two decades ago. COVID-19 has highlighted the parallels between climate and health, and there’s a case to make that it’s time for companies to put their operational and investment muscle into influencing public health outcomes with their choices, products and governance, as they have begun to influence environmental consciousness. In short, business needs to be front-footed about developing ESHG — specifically calling out health in ESG investment. I’d like to suggest that health is the new frontier for ethical and sustainable business.

The pandemic has underscored in an extreme way that economic performance depends on population health; however, at any time the costs of poor health and health inequalities are enormous, impacting at macro-economic, micro-economic and individual levels. According to research from the Milken Institute, chronic diseases have a total impact on the economy of about $1.3 trillion annually. Of this amount, $1.1 trillion represents the cost of lost productivity. As was the case with carbon emissions, the impact of corporate activity on population health and its associated costs are considered externalities, not addressed in business and investment models except in the most egregious cases.

Health, both physical and mental, is currently front-of-mind as the global health crisis has been explicitly linked to an economic shutdown. It is more immediate and visible even than the climate crisis, which took decades to make evident. With COVID-19, business had a chance to demonstrate its effectiveness in the health field (life sciences, especially vaccines) and the upside of engagement is clear. The next focus may be on the downside of businesses not engaging with health.

How Can Companies Operate in an ESHG Framework?

To start with, businesses need to acknowledge that their outputs and products can often influence health negatively. There are ways they can address this imbalance. One way is for them to adopt a similar mindset about health as they do about climate change. You can argue that the health of any company’s workforce is analogous to its direct greenhouse gas emissions. Naturally, safety conditions at workplaces differ, so an office is not hazardous in the same way as a construction site, and it is hard to govern how employees treat their health outside of working hours. But companies can move in this direction by sticking to the Hippocratic dictum: First, do no harm.

The lowest-hanging fruit within the workplace may include rethinking the cafeteria menu, well-being services, gym membership and better work environments – for example, lighting, ergonomic desks and air quality. More recently, it has emerged that mental health is at least as important as physical health, and it’s likely that early intervention and prevention of physical and mental health issues will be more effective than trying to control absenteeism and healthcare costs.

As a next step, the health impacts of a company’s goods or services on its customers need more active attention. With some exceptions — notably tobacco, which can raise a “sin tax” — the health impacts of corporate activity incur costs that are borne by the consumers themselves or by taxpayers. For companies managing their output within an ESG framework, they can now proactively engage to improve public health by self-regulating before regulators impose product bans or punitive taxation. Taking such proactive steps as rethinking materials sourcing and changing ingredients and manufacturing processes to promote rather than impair health are not only commendable, they are good business.

A good example of how this can work is the U.K. foodservice company Greggs, whose shares rocketed 13 percent in May 2019 as a result of an 11 percent boost to revenues following the launch of a vegan sausage roll. This was a bold move from a low-priced bakery chain that was previously known for its contribution to unhealthy eating. Greggs has followed up with a 10-point pledge promising, among other items, that by 2025, 30 percent of its offerings will be “healthier choices.”

Interestingly, brokers assessing Greggs’ performance now see these actions as the equivalent of “greening,” a major topic in the E playbook and equally action-oriented. Apart from offering vegan alternatives and clearer labeling, the company reformulated many of its products in 2016, removing 20 percent of the sugar in them. Salt is the next target.

Looking across other industries to see how an ESHG framework might be deployed, for furniture makers, it might mean identifying alternatives to the toxic chemicals used in plastics and wood stain with which people make contact every day. For middle-of-the-supermarket processed food companies, it could amount to a complete product redesign that, like the Greggs example, reverses sugar and fat-heavy Western diets that create an imbalance in gut bacteria. For alcohol distributors, it might be a scannable bar code that directs consumers to a website providing illustrations of how liver cells die every time they filter alcohol, or how overuse of alcohol can increase fat levels in the blood, which can in turn result in high levels of bad cholesterol.

Bottom line, companies can look up and down their value chains and discover where doors exist that open up possibilities for better health outcomes, much as a retailer would look across its supply chain in order to pinpoint opportunities to replace an environmentally negative supplier with an environmentally friendly one. Healthing the value chain could even be gamified or crowd-sourced, with companies drawing on employee or customer suggestions. Early-investment VC funds also play an important role through their nurturing of start-ups involved in the future of living well and the care economy.

As companies are thus transforming themselves, institutional investors can proactively offer carrot or stick to businesses by adding H to their ESG expectations, providing a new measure by which to assess companies. They can then divest from companies that don’t re-center around health and reinvest when they do.

Examples of carrots that will improve the ESHG score of a company include measures such as appointing a chief medical officer to reinforce a commitment to consumer health, as companies like Hy-Vee and Dollar General have begun doing. On the stick side, in July 2021 Maine became the first state to shift the costs of recycling from taxpayers back onto companies, an environmental exemplar for investors that also has health implications.

Why Business Needs to Step In

Even pre-pandemic, the cost of poor health and the significant inequalities in health and mortality were huge, both on human life and in economic performance. However, it took the pandemic to demonstrate unassailably that economic performance is dependent on population health, both physical and mental. We also saw that government alone couldn’t produce the necessary products, technology or even logistics at scale without significant help from business.

This is a trend that will only become more pronounced with time. My company, Legal & General, is part of a council of businesses working with the U.K. prime minister in the Building Back Better initiative. As part of this initiative, we have taken on several health-first projects, investing in health science and tech research, community and elder health and partnering with health inequality expert Sir Michael Marmot. We supported a global challenge that elicited tech-driven solutions to the next pandemic.

Like climate, health or ESHG, investing is not only about avoiding downside risks but also the upside equivalents of investing in new technologies. Certain businesses — for example, life sciences companies — exist to improve health. The life science sector is the most obvious upside zone for health investors, but many startup healthy food brands are also gaining traction with smart investors.

In our view, by applying an ESHG investment approach, companies can use employee health as a proxy for improved productivity and healthier bottom lines. The converse is also true in the context of an ESG risk management framework: Where employee health is so bad that it creates excessive costs, terrible productivity or future legal risk, wise investors will want to avoid the health equivalent of the environmental taboo of “stranded asset” coal mines.

Keep your eye on ESHG investing: The health challenge is every bit as urgent as the environmental crisis — and governments can only do so much. We need to change our approach to health from the top down and put our money where it matters, solving a social problem that will otherwise continue to get worse.