ESG research playbook: Health care

Lindsay Blitstein, CFA, ESG Analyst
Carolina San Martin, CFA, Director, ESG Research
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At Wellington, we have long believed that strong environmental, social, and governance (ESG) ratings and characteristics can generate value for shareholders and improve a company’s long-term investment performance. We believe this applies broadly across market sectors and have established frameworks — what we call “research playbooks” — for evaluating companies within each sector based on various ESG criteria that we deem to be of material importance. 

Here we look at the health care sector, to be followed by other market sectors in future blog posts by our ESG team.

Key ESG issues for the health care sector

ESG is of course just one input into our investment team’s multi-pronged fundamental analysis of individual health care companies. Having said that, here’s a high-level breakdown of how we prioritize key ESG issues facing the sector:

  • Our framework places the highest priority on the “S” in ESG (50% – 55%), with a focus on corporate culture, product quality and safety, reputational risk, and drug pricing. For managed care companies specifically, we also consider improving patient outcomes, health care access and affordability, and customer relations.
  • “G” has the second-highest weighting in our framework (35% – 40%), emphasizing board composition and structure, diversity of backgrounds and skillsets, and boardroom discussions. We also look for some alignment of pay with performance in compensation decisions, along with a mix of relevant metrics in incentive plans.
  • “E” has the lowest weighting (5% – 10%), in contrast to the “playbooks” of ESG colleagues who specialize in analyzing mining, energy, and utilities companies. However, here we consider the impact of extreme weather on manufacturing and costs, as well as product sustainability and life-cycle issues. 

Sample engagement questions for companies

Digging a bit deeper on particular health care industries, here are some sample “engagement” questions we bring to the table when we speak with medical technology (medtech), pharmaceutical, and managed care companies about their ESG approaches (Figure 1):

Figure 1
Authored by
Lindsay Blitstein, CFA
ESG Analyst
Carolina San Martin, CFA
Director, ESG Research