The healthcare sector is the second-largest in the S&P 500 and that heft highlights some of the unique environmental, social, and governance (ESG) issues related to this sector.
On one hand, healthcare can be an epicenter of positive social change. Conversely, the sector could be vulnerable to governance risk, namely on the political and drug price fronts. That dichotomy could underscore the advantages of active, broad-based approaches such as the Calvert US Select Equity ETF (NYSE Arca: CVSE).
CVSE isn’t a dedicated healthcare ETF, but its weight to the sector is comparable to what’s found in broader benchmarks. CVSE’s status as an actively managed ESG ETF is pertinent because that active oversight can help steer investors away from sector-specific risks. Healthcare isn’t an “ESG offender” in the traditional sense of the term. But there are potential ESG headwinds that are unique to this group. Drug prices are a prime example.
“Although drug pricing policy changes and regulation are aimed at increasing access to medicines and basic services — which would, in turn, mitigate some ESG risk in the sector — the impact on sales could negatively affect some pharmaceutical stocks,” wrote Morningstar healthcare analyst Karen Anderson in an article for InvestmentNews.
Healthcare, ESG: Complex Relationship
Broadly speaking, many large-cap healthcare companies, including some CVSE components, score well in terms of environmental sustainability. However, the intersection of ESG and healthcare gets complex from there. For example, when biopharma firms balance delivering life-saving therapies at price points that generate profits for investors.
In a perfect world, healthcare companies would have affordable prices across the board. But that’s not the reality of the current environment. Typically, the more coveted a new drug or therapy is, the pricier it is. While that may sound like a positive for investors, it could introduce the specter of ESG risk.
“Consumers requiring life-saving medication also tend to have preexisting health issues. Senior citizens and children may be disproportionately affected by adverse outcomes, and those groups typically benefit from consumer protection mechanisms. That can lead to higher scrutiny and litigation risk — especially in litigious environments such as the U.S.,” added Anderson.
Overall, healthcare’s ESG trajectory is solid, but there’s work to be done on the social and governance fronts. Much of those efforts will boil down to healthcare companies prioritizing the balancing act of delivering favorable outcomes for both patients and investors.
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