Investment accounts

Authorised and regulated by the UK’s FCA to provide investment accounts, we are bound by CASS rules to segregate and protect client assets.

March 2021 investment update

Our March investment update is now available to download.

The cyber security skills gap

The cyber security skills shortage has been making headlines for years, but the Covid-19 pandemic has made it more critical than ever.

Thematic ideas | Healthcare and ESG

Investment outlooks / Q4 2020

More than ever, investors are strongly focused on Environmental, Social and Governance factors. Especially in the healthcare sector, these issues have been put under the microscope to assess companies’ resilience.

By nature, the healthcare sector is intrinsically linked to societal and economic welfare as it is supposed to satisfy one of the most basic human needs. It Is central to human happiness and well-being. Consequently, the consumption of medical products and services can involve significant externalities and put consumers in a more vulnerable position.

Often the very nature of it raises ethical controversies about the healthcare sector, the moral boundary between right and wrong could become extremely blurry sometimes. As mentioned in the section on genome medicine, the implementation of some medical research and technologies requires extensive philosophical and moral discussions. Imperatively, these issues need to be taken into consideration in an ESG analysis.


In an ESG investment analysis for the healthcare sector, the Environmental factor tends to have less weight in the scoring process compared to Social and Governance factors.  Historically it has had limited impact on the stock performance. However, the manufacturing of certain pharmaceutical products and medical devices may be harmful to the environment. Some might have chemical activities with huge environmental impacts, such as water and soil contamination. Different research papers have also shown the pharmaceutical industry is responsible for air pollution including acid rain, greenhouse gas emissions and smog formation among the major consequences. Ironically, these effects have an indirect damage to public health and contribute to deaths caused by preventable medical errors. Unfortunately, they are largely unrecognised and unreported.


Social factors are the most important ones to consider in the ESG assessment. The advancement of healthcare research and the discovery of new medical solutions improve the general wellbeing of the society.

First of all, product quality and safety are the paramount issue. Different problems might emerge at different stages along the product chain, from development to manufacturing. Any failure to provide a safe product could result in social damage to public safety. Among different aspects of it, Research and Development ethics in the sector has been the subject of constant debate. This includes bioprospecting, emerging technologies, animal testing and treatment of clinical trial participants. The R&D risk management has been poor and the disclosure level low.

Another main social responsibility issue that the industry is facing is marketing of drugs. Billions and billions have been invested by pharmaceutical companies in advertising. The physicians and doctors are incentivised to prescribe drugs of a specific company regardless of their effectiveness and cost. Perhaps one of the scariest questions we need to ask ourselves nowadays – can we really trust doctors, to whom we entrust our health, if they are part of the medical-industrial complex?

Last May the New York Times reported that top executives of Insys, an opioid company, were found guilty of racketeering charges in a criminal prosecution blaming corporate officials for contributing to the nation’s opioid epidemic. “The case paints a picture of the kind of troubling industry practices that helped fuel the opioid epidemic,” according to Abbe Gluck, a Yale law professor. The company executives were accused of paying doctors to write prescriptions for a much wider pool of patients than were approved for the drug and misleading insurance companies in order to cover the medication. The patients would become addicted to the medication, which is 100 times more potent than morphine. Furthermore, it led the creation of the black-market  version overseas contributing heavily to the epidemy. According to a report by the Organisation for Economic Co-operation and Development (OECD), opioid-related deaths have increased by about 20% across OECD countries since 2011 and have claimed about 400,000 lives only in the United States. Despite this troubling behaviour, Insys became one of the favourite names for investors in the healthcare sector.

The scandals do not involve just pharmaceutical companies. Recently, a healthcare software company, Practice Fusion, was fined $145million for taking kickbacks from drug companies in order to make doctors overprescribe opioid medications. The company developed specific pop-up features designed to manipulate medical prescriptions.

Another huge issue while considering the Social factor is the increase of drug prices. It implies several material consequences: more public spending, affordability and access to healthcare. According to a paper published in the  Journal of the American Medical Association (JAMA) study, which investigates how five key factors are associated with increasing healthcare costs in the United States, “service price and intensity” (including the rising cost of pharmaceutical drugs) accounts for more than 50% of the spending increase. In fact, United States spends more than any other countries on the public healthcare sector, nearly twice as much as the average OECD country, yet with poor outcomes, with the lowest life expectancy and highest suicide rates among the top 10 high-income OECD countries. The excess of spending has not been translated into commensurate benefits.

According to a World Health Organisation (WHO) report from 2019, between 2000 and 2017, global health spending in real terms grew by 3.7% a year while the economy grew 3.0% a year. Public spending represents about 60% of the global spending on global heath and it keeps increasing. Nevertheless, access to healthcare remains an open and burning problem as major pharmaceutical companies are still profit driven without incorporating affordability of medical products and services into their business model. There has not been a uniform and structured approach to promote widespread access to medicine.

The problem of access to affordable healthcare products and services is even more acute in emerging markets, especially among the bottom-of-the-pyramid population. In the meanwhile there has been more demand due to a growing middle class and better awareness of health. This gap between demand and supply has also been raised as one of the main UN Sustainable Development Goals.


Besides the standard governance criteria applicable to other sectors, in the healthcare sector, governance is intertwined with clinical governance as it is ultimately accountable for its effects on the health of the surrounding society. Therefore, it requires a more integrated approach with a long-term vision as the product cycle tends to be much longer. Furthermore, it is a highly regulated sector involving regulation on patent release, product safety and other social issues mentioned in the previous section. Failure to comply with regulatory requirements imply lower credit ratings, less funding and reduced profitability. Numerous episodes of corporate scandals have emphasised the importance of corporate governance in the sector.

What do we look at going forward?

While analysing the healthcare sector through ESG lenses, both internal and external stakeholders have an equally crucial role as it is a sector heavily exposed to public intervention and funding and it directly impacts human lives.

After the recent scandals, both public organisations and consumers are scrutinising healthcare companies in depth and exerting more pressure to reduce costs and to increase effectiveness of drugs. This leads companies to include societal needs and expectations as key pillars of their business survival and profitability.

Covid-19 has exacerbated even more the global trend of increasing health spending.

The healthcare system was not prepared to face the pandemic with its current capacity. At the peak of cases there were moments with extremely difficult moral choices: who deserves to be treated first? Doctor’s safety first or patient’s first? Is there a limit to how much care we will provide? All the pharmaceutical companies are rushing to find a vaccination and medical device companies are producing personal protection equipment. “Have we spent enough in healthcare and have we spent correctly” have been spotlight questions ever since the first outbreak.

The pharmaceutical sector will go through some deep structural changes, especially in the new post-Covid world. A publicly justifiable pricing policy will lower product margins. All the environmental, social and governance issues mentioned in the previous sections will have to be addressed thoroughly to increase the transparency on different matters including prescription practices, drug pricing and product safety. Public trust, which has been eroded in the past decades, will need to be restored. Healthcare companies will have to adopt more integrated healthcare solutions and incorporate consumers at the middle and bottom of the income pyramid in their business model.

From an investment perspective, ESG analysis on the healthcare sector should not represent merely a score to be optimised. It should also not be considered as an isolated outcome to be achieved. Alongside inputs such as risk and return, ESG considerations should be assessed for a more comprehensive investment analysis. It should not be considered the only route to outperformance in the post-Covid investment world despite the recent overwhelming enthusiasm around it; the failure to incorporate it in any investment due diligence will leave investors with an incomplete picture.

Past performance is not a reliable indicator of future returns. Forecasts are not a reliable indicator of future returns. If the information is not listed in your base currency, then the result may increase or decrease due to currency fluctuations.

If not otherwise indicated, all graphs are sourced from Dolfin research, October 2020.

For more information please read our disclaimer.

Up next:
Thematic ideas | The digitisation of healthcare
Read more
To continue reading please enter your email address

    Subscribe me to your updates; I want to be the first to know about your news, investment research, diary articles and events
    I agree with the terms and conditions