Newsletter | Putting the H into ESG
We are going to get super nerdy here. But stay with us.
As regular readers know, Building H developed a rating system — the Building H Index — that measures the affects of products on their consumers. It’s a 1-100 scale where 50 and above can be considered a “good” score - a net positive for human health - and below 50 would be a “bad” score, or a net negative for health.
We released the last index this past October, and we’ve been looking for ways to make it even more impactful. One idea: Might our Index be something that investors might use in evaluating their portfolios - especially so-called socially responsible investing?
Before we could answer that question, we needed to answer a related question: Do social responsible investors consider health now, today? Specifically, how often do these funds invest in the companies we rated, both those with “good” scores and those with “bad” scores?
So we took out our pencils (or opened a spreadsheet) and examined ten of the largest such funds, along with five indices and three ESG ratings providers. The sad truth: Our analysis showed that there is virtually no correlation between how healthy a company’s products are and their inclusion in SRI/ESG funds or indices, nor in a company’s ESG ratings.
Some context here: “ESG” stands for Environmental, Social and Governance - a ratings structure that evaluates how much effort companies put towards these practices. (This has become a highly politicized and controversial topic, needless to say, but it remains a framework for many investors and firms.) “Socially responsible investing” refers to strategies that prioritize investments in companies that are considered socially responsible and/or that are high performers on criteria representing environmental, social or governance aims. These funds are often composed by excluding companies whose social impacts are deemed negative or whose ESG ratings fall below certain thresholds. It is estimated that approximately 12% of all assets under management in the US in 2024 fall into the broad category of sustainable or ESG investing.
You can read Steve’s write-up of our entire analysis here - it’s definitely worth a click! - but here are the key takeaways:
Ten of the leading socially responsible or ESG mutual funds and ETFs had significant holdings (ranging from 9.8% to 31% of overall holdings) in companies whose products and services had net negative health impacts on their users/customers(as measured in the Building H Index).
Companies whose products had a net positive or net neutral health impact (as measured in the Building H Index) made up only 0.57% of the aggregate assets of the 10 leading funds.
Companies with net negative health impacts accounted for 40 times (40x) more of the aggregate assets held by the ten leading funds than companies with positive or neutral impacts.
There is no correlation between a company’s ESG or sustainability rating at any of three top ratings agencies and a company’s health impacts (as measured in the Building H Index).
The methodologies for ESG ratings agencies have surprisingly limited engagement with the health impacts of products and services.
There is a clear opportunity and imperative to bring measures of the health impacts of products and services to the socially responsible and ESG investment sector.
Needless to say, these findings were disappointing. But they also suggest lots of opportunity and room for improvement! There is an urgent need to support more products and services that help people to live healthy lives: to eat well; to move more and to sleep longer and better; that facilitate and encourage social interaction and that draw people to the outdoors. More than simply punishing companies whose products thwart these behaviors, ESG and socially responsible investors have the opportunity to fuel the growth of companies whose products can help build a healthier society.
Our health is quietly — yet significantly — shaped by the products and services we use everyday. These products have a massive influence on individual behavior and, in aggregate, on the health of the public. Yet even investing that purports to support socially responsible ideals, like human health, fails to account for this impact. This represents a clear gap in the accounting of socially responsible and ESG investment, and a missed opportunity to have a positive impact on one of society’s central challenges — human health.
The responsible investing community has an opportunity to take the lead in drawing out which products and services influence health, and to develop and integrate metrics that assess those impacts. Most significantly, these investors and investment firms should work to apply these health-centric measures to their ratings methodologies and portfolio composition decisions. Again, read more here.
Can you help us bring this discussion to the socially responsible investment community? We’re pitching a session at SOCAP25, the premier gathering of this community, to discuss this analysis and figure out a way forward. There’s a public voting process – anyone can vote – and you can support our pitch by clicking here. And while you’re there, check out the many other great session ideas, including this one with Thomas on aligning profit and purpose. Voting ends this Sunday, April 13.
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