Why should investors focus on health as much as they do on wealth?

The pandemic shone a light on the importance of good health for our society, and we are now beginning to truly understand what we mean by ‘health is wealth’. But while this expression is often used to make us realise the importance of looking after our own heath, its application is far broader.

On a societal level, health is one of the biggest drivers of economic outcomes, so significant economic gains could be made if the business of improving people’s health becomes everyone’s business.

However, since investments have mostly never been looked at this way, much capital is currently invested in a way that is aligned with poor health outcomes, through bad diets, unavailability of medicines, pollution and many more.

By asking the right questions, we can move capital to be aligned with better health, and we’re now beginning to see activities that could lead to real impact.

How does health affect investors?

Investors rely on the ‘health’ (no pun intended) of the wider economy to ensure they get the returns they need – and the robustness of the economy is strongly linked to people’s physical and mental health.

Poor health can limit the size and growth of the workforce, and long-term chronic health conditions can lead to reduced worker productivity and absenteeism. The rise in economically inactive people of working age in the UK has been strongly linked to illness, with more than a half of those not working since the start of the pandemic citing ‘long term sickness’ as the issue. The World Economic Forum estimated that mental health conditions alone cost the world economy US$2.5 trillion in 2010, with this expected to rise to US$6 trillion by 2030. Meanwhile, the Integrated Benefits Institute estimated that poor health cost employers in the United States US$575 billion and 1.5 billion days of lost productivity in 2019. The same study estimated that employee ill health cost businesses US$3,900 per employee each year.

On a human level we can all agree that poor health is damaging, especially when we see health inequalities amongst marginalised communities.

But it is clear from an economic perspective that costs resulting from reduced worker productivity are huge. Many large asset owners are increasingly thinking like Universal Owners – they own a representative slice of the economy and externalities produced by a company in one area can have a detrimental impact on their overall portfolio.

Regulatory and reputational risk can also influence how health outcomes affect economic performance, with increased regulation around health factors like sugar consumption and tobacco use potentially accelerating or hindering a company’s growth.

On an investee company level, health can be one of the key drivers (or negators) of portfolio returns. But this is also true on a wider societal level - for example, the increased incidence of ill health in society at large may lead to governments raising taxes to pay for healthcare.

This mix of company specific, sectoral and economy-wide risks and impacts results in a complex picture, but one that can be addressed with thought and the right frameworks.

There are plenty of potential upsides. For instance, reducing NHS waiting lists in the UK could bring economic benefits equivalent to £73 billion, largely by increasing workforce participation, but also by saving money on how much government and households spend on health and care services. By addressing long-term conditions like mental health disorders and diabetes, an additional 120 million people could participate in the global economy, contributing an additional $4.2 billion by 2040. GDP could be lifted by as much as $2.0 trillion by improving productivity through better childhood nutrition.

How can investors impact health?

Investors are some of the biggest influencers of company behaviour and capital, and the fundamental role businesses can play in ensuring healthy lives and promoting wellbeing for people of all ages is recognised in the UN’s Sustainable Development Goals.

Investors can align portfolios with better health outcomes by ensuring that investee companies are taking steps to enable their operations and supply chains to improve through the three pillars of health and wellbeing as defined by Shareaction: employees; the consumers of products and services; and the health of communities.

One example of this involves investment managers working directly with companies. We’ve seen stewardship teams aiming to address how poor diets drive ill-health by engaging with large supermarkets on nutrition targets – for example targets on percentage of total sales to come from healthier food by 2025.

What can investors do in practice?

Investors can use several tools to assess the extent to which public health issues are integrated into investment decisions made on their behalf.

Most asset owners delegate running their assets, including the stewardship of their stock holdings, to asset managers. The stocks might be held directly or through pooled funds, so any approach needs to address this reality. The complexity of most institutional portfolios, which could consist of thousands of companies in public stock markets, corporate debt markets and private markets in every industrial sector, must also be taken into account.

From Environmental, Social and Governance (ESG) progress in other areas, like climate, we’ve learnt some key lessons:

1. Collaborative action. Single asset owners cannot change much by themselves. Having transparent and open frameworks that asset owners can ask their managers to adopt is essential to co-ordinate impact.
2. Clear Overarching Frameworks. Health, like many ESG topics, is multifaceted with many cross-cutting areas. To approach it effectively, a framework is needed that brings everything together, whilst recognising the detail in each individual area and the themes that are most material across different portfolio sectors.
3. Independent quantitative benchmarks. Companies and asset managers can always tell a good story in specific areas in response to vague asks, so the asks need to be distilled into quantitative benchmarks, ideally independently measured and disclosed publicly. These should be based on a scientific approach, but must also be understandable to a generalist. For example, the percentage of revenue from healthy (or unhealthy foods) or the availability of vaccines to marginalised groups.

LCP has supported ShareAction with creating the Investor Guide on Health, a comprehensive guide on how to integrate health into responsible and sustainable investment strategies.

Asset managers could use this guide to explore, for example, if and how the components of health are covered by existing policies around voting and engagement.

Some asset managers are starting to think along these lines already – in LCP’s latest Responsible Investment survey, about half of the managers surveyed engaged either frequently or occasionally on public health related issues. However, that still left half who engaged rarely or not at all, suggesting the area remains underappreciated and revealing scope to level up the industry’s approach. The Investor Guide on Health could be a key tool in doing that.

On a broader level, looking beyond investee companies, investors should also ensure that population health considerations are fully integrated into their investment research and decision making, their public advocacy and their engagement with policy makers. Our Health Index tool developed jointly with the ONS could act as useful support for advocacy efforts, valuing the stock of local economies based on the social determinants of health in the UK.

Conclusion

We have an opportunity to rethink the role of investors in health and to build more resilient and sustainable business and financial systems. We’re excited that LCP is leading the way by bringing together the knowledge of the quantitative drivers and measures of health of our health analytics team with the experience of our investment team in researching stewardship approaches.

Prioritising health as an investment issue will improve corporate resilience, deliver better lives, and promote greater individual, societal, and economic prosperity – it feels like a no-brainer, but the key is how to make this happen in practice in a complex world with many competing priorities. The Investor Guide on Health marks an important point in giving asset owners something concrete for their asset managers to act on.