In a week when the World Health Organization delivered a stinging rebuke to governments and companies for taking a "me-first" approach to global vaccination, we talk to fund managers about the ESG risks health investing presents.

With the world's attention on the vaccine to salvage economies and restore sanity, we spoke to BB Healthcare Trust portfolio manager Paul Major about the sector’s approach to ESG in these challenging times. A lot of focus has been on pharma and governments playing fair in delivering a successful outcome.

"We have intentionally not played the COVID vaccines," Major said, referring to funding any contenders. "The decision was made long ago because there are several hundred vaccines in development and that is quite frankly several hundred more than the world will ultimately need. Logistically, vaccine manufacturing is also complex and their distribution equally so," he said.

Not known for mincing his words, Major has spent two decades in the sector as a financier, analyst and fund manager, starting out as a student of biochemistry.

The global effort is largely in the hands of a few long-standing companies, he said. "Glaxo, Sanofi, Pfizer, Johnson & Johnson, and a few others are likely to dominate because they do already."

The fact that vaccines are supplied by tender "and the extent to which Gavi has been able to coordinate global purchase and drive down vaccine costs, has been profound,” he said.

But as the World Health Organization warned this week, getting equitable access is easier said than done.

"During the H1N1 pandemic, by the time low-income countries received their vaccine supply, the pandemic was over," WHO’s director general Tedros Adhanom Ghebreyesus, said. “We don’t want this to be repeated.”

So far, around 40 million doses have been administered to 50 higher-income countries, and just 25 doses in one lowest-income country, he noted on the current pecking order.

"Even as they speak the language of equitable access, some countries and companies continue to prioritise bilateral deals, going around COVAX, driving up prices and attempting to jump to the front of the queue," he said.

He blasted manufacturers for prioritising approval in rich countries where profits are highest, rather than submitting full dossiers to WHO. "Such actions will only prolong the pandemic," he said, which by IMF estimates will save the world roughly $500 billion for every month it is curtailed.

Guillaume Mascotto, head of ESG investing at American Century is another asking ESG-minded investors how to prevent the effort turning into “a pharma arms race.”

“From an impact investment standpoint, those exposed to healthcare in their portfolios should not lose sight of the importance of access to medicines/therapies in both developed and emerging markets," he said. "If the COVID-19 vaccine is not affordable and accessible, then it is not sustainable."

ESG in many respects has gone nuclear.

Getting engaged
The Kansas-based firm urged investors to engage with companies involved in developing a vaccine with state financial support to discuss how these efforts are lining up with societal interests. Mascotto also raised the matter of medical patents and striking a balance between protecting and sharing knowledge to tackle global public health issues.

The COVID-19 vaccine market is expected to be worth $39 billion in 2021 as developed markets (with populations of 1.3 billion) ramp up efforts, and $16 billion the following year as less-developed markets (with populations of 6.5 billion) effectively catch up, Morningstar has forecast. The ratings analyst is also warning about equitable access to vaccines as a major ESG risk for pharma companies and keeping prices low.

As ESG has become the prism for viewing "sustainably," we asked BB Health's Major about the sector challenges.

"When you are considering your "S" and "G" -- giving back to the community; ensuring diversity in your human resources; optimizing your manufacturing footprint, for example -- companies at the developmental level have very unique skills requirements because they have only got tens or hundreds of employees."

Being small and on the innovative end, “their only criteria is ‘I need to get the right person, whoever they are and wherever they are, because that’s what I need right now. If I need someone who is a regulatory affairs person, I will take whatever one I can find because they are in demand. I haven’t got a graduate training programme because I don’t need one.’ So what you find is a very strong correlation between the size of the company and the complexity of the organisation and the scores on the S and G side, and investors need to be really mindful of that.”

How fund managers get around those hurdles is by taking a much more pragmatic approach, he said. "ESG assessment is a qualitative not a quantitative exercise and you cannot reduce the culture of a company to a number."

“If you look at the ESG aggregated scores for most of those in the big healthcare indices, they score lower than some of the big oil companies, and defence and tobacco companies. This is faintly ridiculous because, conceptually, the healthcare industry is doing more good for the world than extractive, tobacco or people who sell weapons.”

A discrepancy he mostly ascribes to corporate governance.

“A lot of the time the board is not nearly as developed and the CEO might be the chairman as well. A lot of those on the board have potentially come through the company. So board independence is an issue.” That is the reality, he says.

On the social side, small companies simply are not that active. Also, some can be notionally scored down if their products can be used for stem cell research or if they are involved in animal testing. “Well, that is a legal requirement for the development of human pharmaceuticals so you are not going to avoid that.”

His fund's ESG approach is first to understand whether a company is doing anything controversial and second the level to which the management is willing to engage with topics important to the fund. “Then it is whether their direction of scores, in aggregate, are improving. As a company grows, you’d expect these things to get better not worse.”

As a fund focused on specialist companies rather than the Johnson & Johnsons of the sector, Major argues that it is highly unlikely that the portfolio is going to achieve an ESG score comparable to a broader health index.

"We’ve had investors ask us for the aggregated score on MSCI or on Sustainalytics for our portfolio, and that’s fine. It is a completely meaningless number but we can give it to you. But we are never going to hang ourselves for having an unrealistic quantitative approach like that."

While ESG is conceptually well-established, using it effectively to score the approach of fund managers is “still in its infancy,” he said.

As far as thematics attracting growth within the sector, interest in the medium term lies in technologies that enable patients to take a much more proactive role in managing their own healthcare needs.

Another is the field of diagnostics. “The whole treatment journey begins with diagnostics. What is it that is actually wrong with somebody? How do we understand that better and quicker?"

Major says the diagnostic power at the desktop for primary care is going to increase dramatically in the coming years. “This involves data and tracking people through the healthcare system so less of the follow-ups get lost.”

Where this is developing fastest: "Culturally and from a regulatory standpoint the US is better at embracing technology. The NHS is trying to change. Also, if you are a smaller wealthy country, it is easier to roll these things out. Around electronic management of patient data, Sweden is a world leader, for example. But you have to take a global approach. The best ideas win and they could come from anywhere.”