The pandemic has highlighted the systemic issues that drive poor health and health inequalities – and how inextricably linked health is to wealth.
The U.K. government published its Levelling Up White Paper on 2 February, with 12 missions to address these systemic issues, including a re-commitment to the government manifesto goal to achieve five extra years of healthy life expectancy while minimizing health inequalities.
Matthew Taylor, Chief Executive of the NHS Confederation, says, “the government and healthcare system can only address some of the systemic issues leading to poor health, and there is growing awareness that many of the solutions lie outside the National Health Service (N.H.S.).”
The business community has immense power to drive positive change and impact. The total value of pension funds invested in the U.K. each year is about the same size as the U.K. economy and the total assets under management is more than double that, so the power of investing is huge.
Jennifer Dixon, Chief Executive of the U.K.-based Health Foundation, says: “This power can be used to influence the risk factors that can damage your health, like unhealthy food, poor work, pollution, gambling, and poor housing, but it can also be used to promote health.”
Far more attention is needed to harness this power to good effect. Social issues — the “S” in Environmental, Social and Governance (ESG) mandates — has come into much sharper focus as a result of the coronavirus pandemic.
Employee safety and benefits and customer well-being has received much more attention, yet identifying the most useful indicators for evaluating these social issues is a challenge. This stems from a lack of consensus in the industry surrounding what constitutes the “S” in ESG: in one survey 46% of investors found the “S” to be the most difficult to analyze and embed into investment strategies.
Standard-setting organisations such as the Value Reporting Foundation (incorporating the Integrated Reporting Framework and Sustainability Accounting Standards Board- SASB) and the Global Reporting Initiative (GRI) are trying to address this by building on the existing frameworks for social issues in ESG: evaluating human rights, product quality issues and the health and safety of manufacturing processes, data security and digital rights and socio-economic inequality alongside diversity and inclusion criteria. These and other standard setters and international organisations have built a platform called the Impact Management Platform, which aims to provide clarity to the market on measuring and managing their social and environmental impacts.
ESG-guided investment is significant huge and growing with sustainability high on the agenda for most businesses. Worldwide, a third of all professionally managed assets, or roughly $30 trillion, are now subject to ESG criteria and form part of a movement to reform capitalism in recent years towards a more inclusive “stakeholder capitalism” model advocated by the World Economic Forum.
The Business RoundTable, a U.S.-based group which represents CEOs of the country’s largest companies issued its Statement on the Purpose of a Corporation in the summer of 2019, endorsing a view of capitalism that serves workers, customers, and the environment in addition to shareholders. Investors with $100 trillion of assets under management have signed on to the United Nations Principles for Responsible Investment, which advocates for a greater focus on ESG issues in investing.
But has this commitment achieved anything yet in terms of real social impact? ESG measurement is in unregulated territory, and this lack of regulation has not made it easy for investors to distinguish between investments with robust ESG credentials and those which are “greenwashing”– making misleading claims about their environmental practices, performance or products. Far from changing corporate behavior and creating a better world, some ESG funds have functioned more to make investors “feel better” by excluding “bad” companies from their portfolios.
It is true that current ESG methods fail to capture the complex, systemic nature of social and environmental systems, and indeed that of business organizations themselves. Another concern is that ratings tools such as MSCI -used by the majority of big firms- don’t measure a company’s impact on the planet and society; rather, they focus on how ESG issues affect the company, its shareholders and the bottom line.
The asset management industry has a long history of issuing public statements in support of social issues but with unclear goals. Risk and reward are the key drivers: if asset owners are convinced that better behavior can produce equal or better returns while reducing risk of adverse regulation, tax or litigation, they will invest in good things.
So then, what is needed is for asset managers to support companies genuinely making changes with clear goals around purpose.
Things seem to be changing. BlackRock, Vanguard and State Street all signed on to the Net Zero Asset Managers Initiative, a commitment to push the companies they invest in toward cutting their net greenhouse gas emissions completely by 2050. At COP26 in November 2021, nearly 500 global financial services firms agreed to align $130 trillion – some 40 per cent of the world’s financial assets – with the climate goals set out in the Paris Agreement.
Engine No 1 is a new breed of investment firm harnessing shareholder activism and hard ESG data to drive economic value- driven by their belief that social good also benefits the bottom line. They made headlines in the New York Times when they successfully waged a battle to install three directors on the board of Exxon with the goal of pushing the energy giant to reduce its carbon footprint- in the process they got votes from Exxon’s three largest shareholders, BlackRock, Vanguard and State Street, on its side and supporting genuine change.
Agreeing metrics and aligning incentives is also key to drive change. Engine No 1 is pioneering a new research-based approach, the “total value framework”, that integrates non-traditional but financially material ESG data, methods, and systems into traditional analysis that is objective, replicable, and auditable— and, as a result, readily incorporated in financial disclosures.
To date, agreement on key metrics and reporting frameworks for environmental factors has crystallized more rapidly than for social factors. But 2022 could bring increasing convergence on the data, metrics, and reporting requirements most relevant to social issues — alongside rising pressure to ensure these metrics measure impact, not just inputs. The newly formed International Sustainability Standards Board is planning to address the lack of a common baseline for disclosure standards consistent across jurisdictions and industries.
Regulation may also be needed. The EU is also planning an update of its Non-Financial Reporting Directive, expanding its reach through a new regulation called the Corporate Sustainability Reporting Directive, or CSRD, which will require information on how a company’s business affects society and the environment.
Given the increasing evidence showing health impacts on global prosperity, the time is coming to bring health into an ESG framework focussed on outcomes. Jordan Cummins, Health Director at the Confederation of British Industry (CBI) in the U.K. says that “business-led intervention to enhance employee health could reduce the current fiscal burden of £300 billion by 10-20% in the U.K.”
Health data and metrics are improving rapidly and the positive and negative health impacts of companies can, along with climate impacts, be assessed to encompass 3 key areas: 1) direct impact on employee health, 2) secondary impacts via products and services sold and 3) contribution to community and societal resilience. With health data plentiful and objectively credible, and at least on a par with climate data, the time is now to incorporate “H” into “ESHG.”
John Godfrey, Corporate Affairs Director at Legal & General, a British multinational financial services and asset management company, says, “it is clear health equals wealth, but health has been missing from the environmental and social factors that investors take seriously. There’s a lot more we can do as investors to make sure that health outcomes and economic outcomes are seen as being aligned. I think the ESG framework should be even more explicit and call out health to become part of ESHG.”
Romina Boarini, a champion for inclusive growth as Director, OECD Centre for Well-Being, Inclusion, Sustainability and Equal Opportunity (WISE), concludes: “We need to harness the positive disruptive power of business to enhance health worldwide. Coming out of the pandemic, it is time to do the right thing but we need to do it with conviction, mobilizing business leaders and investors, employers, workers, consumers and other stakeholders in a data-driven framework to achieve sustainable system change and impact.”