Politics. ESG funds have always been a bit amusing. Health care names are almost always heavily represented. I guess because it isn’t dirty?
Think again Larry Fink.
If your idea of “social” is blanketing a very popular and effective drug, Humira, with more patents than Washington has lawyers just to avoid much needed price competition, you may have left your moral compass on the subway.
The fact is, as much as we would all love American industry to be rewarded for behaving prudently and judiciously toward the environment, society at large, and workers, slapping higher fees on what is just another ETF is probably not going to get the job done.
It might make things worse. Davita, considered by many policy makers to be predatory, can get a pass by touting their record on sustainability.
Voila! A “leader” designation from MSCI.
ESG investing and the companies that promote it has, then, become an easy target for Republican governors. Florida has dropped an ESG requirement for its pension investments. Texas is threatening to withhold its business from firms and funds over ESG policies.
(At which point, Ralph Hamers probably learned UBS had a municipal bond department.)
These governors, to be followed by more I am sure especially if fiduciary duty provides cover, can waive off ESG standards because they do nearly nothing, as far as the health care sector goes, to promote E, S or G.
Untethered from third-party declarations about what is good for the people of Florida or Texas or America, perhaps pension fund managers can look at the problem anew and ask what their investments are doing to promote good health in their states.
Investing in stuff that works almost always beats returns on stuff that doesn’t.
Policy. Of course, it is getting harder each day to discern what “works.” The FDA has all but abandoned efficacy as part of their mission. While approval of Aduhelm has received the most notoriety, it was proceeded by half a dozen oncology drugs with less than stellar track records. It has been followed by Adcomm approval of AMLX’s ALS drug whose usefulness is debatable.
And of course, the questions surrounding the safety and efficacy of SARS-CoV-19 vaccines as applied indiscriminately to all population cohorts, continue to multiply.
It seems than FDA has assumed a new role. It appears committed to saving the pharmaceutical industry from its very pricey stranded assets. Janet Woodcock said as much after the approval of Aduhelm, acknowledging the large sums of money spent on researchers’ single-minded obsession with their amyloid theory.
In late 2019 MRNA had been struggling for years to make its signature technology, mRNA, into a viable product. Pfizer had declared, not knowing what was coming their way, that 2020-22 would be “rebuilding years.” You know the rest of that story.
Rescuing the drug industry from its misspent capital is probably not entirely intentional. In an era when a sponsor can summon deafening grassroots advocacy through “citizens’ petitions,” social and broadcast media and, of course, lobbying muscle, the slow and ponderous regulatory process is at a significant disadvantage.
The effect is flipping the precautionary principle on its head. The FDA would prefer licensing a drug that turned out to be ineffective and perhaps unsafe than face the wrath of the public for not approving a drug that turned out to be effective and safe.
Power. With ESG past peak, the FDA, barring a major update to their regulatory authority, without credibility in the U.S. and abroad, what becomes of certain (mis) guiding principles of investing?
It has been understood for half a century that FDA approval was a precondition and, in many cases a guarantee for revenue. The fig leaf of ESG has assured the unconditional love of passive funds for business like ABBV and PFE.
Part of the answer has been investments in the private markets. Not on the Tiger Global fast term-sheet model but using the traditional due diligence and asking substantive questions about outcomes and customer satisfaction.
The beauty of private company CEOs – the ones that aren’t hurrying to the IPO window before they make a dime – is they don’t need to worry about the artificial and counterproductive demands of Wall Street, the SEC and, increasingly Congress.
Some of those companies are going further and seeking to operate outside the regulatory system as much as possible. Opportunities abound in making employer sponsored insurance operate more efficiently. Solutions for cash-paying individuals are also a growth area.
I was lucky enough to take a client around Nashville to meet many of these exciting solutions a few weeks ago. The future is bright.
Emily Evans
Managing Director – Health Policy
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