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The idea that public corporations have obligations that extend beyond the fiduciary responsibility to shareholders will be the dominant measure of responsible business behavior in the coming decade. Uncertainty about the extent of these commitments – commonly referenced as the environmental, social and governance (ESG) agenda – has produced equally variable responses from companies in the health care business.



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>   Is ESG yet another external risk factor that must be handled deftly to avoid a loss of investor and consumer confidence – and a potential big hit to the bottom line?

>   Or is it a new opportunity to earn the goodwill that strengthens ties to customers, raises operational efficiency and attracts talent?

>   To address these questions, In Vivo recently sat down with Marshall Gordon, senior health analyst at New York’s ClearBridge Investments, whose involvement in impact investing extends back three decades, and today evaluates more than $115bn in assets for ESG risks and opportunities.

Estimates of the size of global investment assets vary considerably, from the $31tn figure compiled by the leading ESG advocacy group, the Global Sustainable Investment Alliance, to $3tn, by the bankers at JP Morgan. There is consensus that, whatever the number is, it is going up. The demographics are good – millennial investors are major backers of ESG, as are sovereign investment funds, public employee pensions and family offices backed by private equity.

Numerous initiatives are underway to establish better metrics to assess ESG opportunities and monitor the performance of these assets. Nasdaq’s May 2019 ESG Reporting Guide 2.0: A Support Resource For Companies is but one example.





Given the widely held view that medicines, devices and diagnostics are public goods, funded in part by public money, pharma and medtech face a high credibility bar on ESG. It is no longer standard practice to assign the ESG portfolio to the corporate policy team – direct access to top management is the new normal.


(Q) In Vivo: ESG is not a new function in the stock trading business but its profile has certainly grown in the last few years. What brought you to this field and why is ClearBridge committed to ESG as a key element of its investment management for clients?

(A) Marshall Gordon, ClearBridge Investments: I have a background in investment banking, which led to my exposure to health care – many deals were on the table which required me to learn the industry. Subsequently, I moved into equity research which called for greater facility with data, as well as an understanding of key macroeconomic and social drivers. It also demands a high level of intellectual honesty to make good investment decisions, which I liked and is clearly part of the ClearBridge culture.

I also appreciated the integrative approach to equity investment research at ClearBridge. Unlike most other Wall Street firms, ClearBridge puts the senior sector analyst – like me, for health care – in the lead when evaluating ESG impacts for that sector. Every fundamental analyst at ClearBridge is an ESG specialist as well. We don’t follow the usual path of relying on a separate unit to address the entire range of ESG issues. In our view, every industry sector is different in terms of what ESG means – oil companies don’t face the same set of issues as health care businesses. So, we put the responsibility for handling the ESG brief in the hands of the sector analyst, who has the relevant expertise to define the ESG issues that count in the specific business area and to know with whom to engage in determining how ESG will shape investment decisions. In other investment organizations, you will find that ESG sits apart from the real sources of sector expertise, making ESG more of an extracurricular policy topic than a function that is integrated to the business. In fact, it is still a common approach to ESG on Wall Street to allocate ESG evaluation to an external third party who provides advice and support as needed. Now that ESG has come into its own as a determinative factor in investment, many investment companies are scrambling to make up for lost time.

In addition, the ClearBridge ESG platform is an expression of the overall philosophy we take to investing. As active managers, we choose not to own everything; our portfolios are generally quite concentrated, often with only 50 or 60 stocks, which we hold for the long term – seven years, on average.  This facilitates access to management, with whom we can engage directly on business and ESG issues.

And we don’t carry sticks. We don’t make demands. Our approach is progressive in that our goal is to make our companies aware of what we think on ESG and to share best practices we see elsewhere in their lines of business. It’s never a “check the box” exercise. We don’t ask a drug maker to do the same thing as a managed care company or a manufacturer of medical devices. The ideal outcome is after speaking with us, management comes to a decision on its own – it’s the soft light of self-realization rather than the glare of being under the spotlight.


(Q) Can you highlight the major forces shaping the investor landscape in health care today, and how these compare to the situation from decades ago?

(A) Gordon: Perhaps the most significant change has been the recognition that outside investors have a right and obligation to set the standards of governance for a corporation. This includes input on such issues as the structure of boards of directors, or on workforce conditions like diversity, inclusion and anti-discrimination rules. Specifically, to health care and biopharma, access to affordable medicines is now an inescapable top-of-mind issue for the entire C-suite, from patient assistance and specialty hub services programs to drug benefit design and re-insurance geared to provide cover for high-priced drugs. Engagement with health care and pharma companies on market access policies is becoming more structured and transparent, with the dialogue increasingly taking place in the public arena.


(Q) What about the possibility of incorporation in the US as a B class – benefit – corporation, which allows boards to pursue social and community priorities like the environment in addition to the fiduciary obligation to shareholders? Is this adding momentum to the ESG movement?

(A) Gordon: There are very few publicly traded companies that are certified as a B-corporation. However, this is starting to change, as a few (small) public companies we review as investment candidates are starting to explore the feasibility to get certified in the 36 US states that now grant eligibility for this status.


Future States

(Q) Within the space of five or six years, more than half the US workforce will be composed of individuals age 35 or younger. Surveys show that millennials are the demographic group most eager to invest using ESG criteria. Family offices representing the greatest reserves of wealth are also trending this way. How is this coming wave around socially responsible investing going to affect big companies – and particularly big pharma?

(A) Gordon: Millennials tend to get the idea of ESG. The future is top of mind to them; many have direct experience with parents who lost their savings during the financial crisis, and they are approaching finance itself with caution. The conversations young people have with their families, schools and employers translate into a growing investor interest in incorporating a responsible investment dimension into their finances – and the investment industry is working toward providing it.

The generational demographic stoking interest in responsible investing coincides with an equally important shift in how institutional investors apply the fiduciary principle – the duty to always act in a manner that maximizes the financial return for the client – which is now inclusive of a broader interpretation to include consideration of social and environmental issues. The premise is that failure to consider issues like patient access to medicines, the environment or workforce diversity and inclusion could result in losses for investors in the long term. The European Union, too, has been very assertive in promoting the idea that generating wealth requires attention to the underlying social consensus that legitimizes high returns, and the US will not be far behind.

I believe the interest in ESG represents an opportunity for big pharma. Ten years ago, when I visited a big pharma or biotech HQ, ESG rarely, if ever, came up. Today, it is definitely on the list of key topics to discuss. It’s not a “check the box” exchange; we expect to be scrutinized and to justify our views with hard data.
This comes as no surprise to me. Health care and pharmaceuticals are sectors that are well-suited to bridge the space between the fiduciary principle and those wider macro trends that impact global economic and social well-being. Health services and pharmaceutical and medical devices are widely seen as public goods, where the challenge is to provide a socially responsible product in a market milieu. What better way is there to have a positive social impact than discovering and bringing to patients innovative products that treat and cure disease?

Accelerating innovation for an unmet need is the core mission of any successful company and biopharma has, in most cases, been doing that for years. If drug companies do their jobs right, their products are going to improve human health. The culture they work in doesn’t pose the ethical dilemmas that confront some other sectors: when fossil fuel companies do well, they help destroy the planet. Instead, the challenge in health care is to do more to reduce the cost and logistical burdens on patients to get the treatments this industry has invented, where nothing existed before.


(Q) How is ClearBridge handling the growing prominence of ESG investing?

(A) Gordon: ClearBridge has invested heavily in a firm-wide ESG integration approach. Our ESG investing criteria now covers 95% of the $145bn in the various assets held by ClearBridge. Fundamentally, this means that an ESG analysis has been conducted on each stock, generating an internal risk/reward and ESG rating, as well as a plan to engage with the company on an ongoing basis. The aim is to get this number to 100% of our asset base before long.


To Each Their Own

(Q) Do you see much difference among biopharma companies in how they approach the ESG platform?

(A) Gordon: There are substantial differences, driven by factors that range from maturity and size to the characteristics of a company’s culture, which is often set by the CEO. We see companies that look at ESG as their guidepost for best practices and are always seeking that positive equilibrium between quality and costs and efficiency and outcome. There are also the laggards that still don’t see ESG as a priority or are not sure how to move from public relations rhetoric to a full business commitment. Some are reactive and heavily dependent on watching what their competitors might do first. We also distinguish between start-up biotechs at the pre-revenue stage, those who have one or two drugs across the finish line, the more mature biotechs with larger product portfolios and finally the big pharma giants.

Every company will face different sets of opportunities and challenges as they move through these stages of the growth cycle. However, I would say biotech companies often relate to the ESG agenda because of the simplicity of their message – they exist to help patients in a disease area for which there are few, if any, treatments. They also don’t have the legacy traditions that keep bigger, older organizations from moving quickly to address governance issues.

One trend we have noted is what happens to a small biotech when the founder, who is usually an entrepreneurial scientist or physician, hands over the reins to a commercial manager. Although it is often a marker of success – finally, there is a product to sell – the transition can result in stumbles on the culture and governance front if it’s not handled astutely. Suddenly, all that wonderful science must yield to the demands of shareholders to make real money.

An example where we see it being done well is Agios Pharmaceuticals, a Cambridge-based start-up that attracted our interest early on; ClearBridge has a 2% stake. Under Agios founder and CEO David Schenkein, a physician-scientist, the company has made that difficult transition to a two-marketed product company. Last year, Schenkein recruited Jacqualyn Fouse, an ex-Celgene commercial lead, to succeed him as CEO and take the organization to the next level. To help scale up, Fouse and her team are consulting widely on what ESG means for Agios’ future – and how to communicate that perspective to the investor community. Good governance is a big part of the picture for them. It’s a very proactive approach that some larger companies have taken years to figure out.

Elsewhere in health care, CVS/Caremark is a company that has adapted an ESG agenda as its market reach has expanded. The company has evolved from an over-the-counter drug retailer and pharmacy chain to a pharmacy benefits manager (PBM) and, with the recent addition of Aetna, to a health plan insurer. The company is positioning itself as a health and wellness provider whose extensive retail presence gives it access to a huge population of patients, which CVS can now serve in a variety of different ways. The decision to stop selling cigarettes was a major ESG response to this dramatic repositioning of the business, one where management felt it was worth it to take a hit on revenue to be consistent to its mission as a health care company. And now, with Aetna and a PBM, the goal is to take this mission to the next step, with additional on-site clinical interventions designed to achieve better health outcomes at a lower cost. CVS is an example of how companies are taking the ESG theme and running with it – to communicate and build the brand around a much broader set of metrics centered on reputation.


Social Is Pharma’s Soft Underbelly

(Q) ClearBridge’s latest impact report includes a chart that shows the E, S and G weighting by sector. The biopharma sector’s biggest allocation within “ESG” is Social – 65%. Can you clarify what this means?

(A) Gordon: What we mean is that society expects the health sector overall to do one thing well: improve the state of human health. That entails a set of obligations for biopharma, which is to promote better access and affordability for medicines and vaccines. Some quarters of society believe that drug donations and co-pay assistance programs are not enough. Pricing of medicines is the fundamental issue, not just for established medicines but for those new cures coming from gene and cell therapy. How is your company going to make these products affordable so society avoids the situation where only the rich will benefit? The social exposure is so high because right now many drug companies do not answer this question well to public stakeholders. Another related question is being transparent about the value each new therapy brings and how a pricing and access strategy will capture and deliver that value to the patients who need it.


(Q) What is the ClearBridge message to biopharma companies and investors on the Access to Medicines Index, an annual ranking of the 20 largest biopharma companies produced by the non-profit Access to Medicines Foundation, based in Amsterdam, with the aim of making medicines more affordable in countries of the developing world. How important is the index to you in evaluating ESG performance?

(A) Gordon: We’ve been actively working with the Access to Medicines Index for several years.  We discuss the ranking with company management.  We see this as one piece of making sure patients globally have access to medicines. But it’s not the whole picture.  The initiative focuses on developing countries, which is important, but wealthier developed countries, including the US, are just as critical to consider.   There are still huge access issues to address, especially in the US health care system, where patients bear a significant portion of the cost.


(Q) It seems a prerequisite for this movement is a clear definition of what ESG is – and what it stands for. Has the global investor community formed a consensus so that when this term comes up everyone agrees what it means?

(A) Gordon: There is some ambiguity about ESG and the many equivalent terms that surround it. We were among a group of global asset managers who issued a report in 2002 with the United Nations Environment Program Finance Initiative (UNEP FI) that led to adoption of the term “ESG.” It was a summary of the focus we put on Social, Environmental and Corporate Governance in making the case that ESG factors can and should be incorporated into institutional investment. Our CEO favored the term “ESG” that was more straightforward (than socially responsible investing). Our position was corroborated when Japan’s giant Government Pension Investment Fund (GPIF) – the largest in the world – in recent years decided to adopt ESG as its preferred moniker. In Europe the term “socially responsible investing” (SRI) is cited more frequently in place of ESG. “Impact investing” is another shorthand attempt to place the ESG concept in a larger context. Finally, there is the most inclusive – and confusing – word of all: sustainability.

Despite the diversity of terms, I believe we in the investment community are much closer on what we are pursuing. Business has a responsibility to contribute to the communities of which they are a constituent part. It is good for business to do so. Return on investment can be validated in many ways in addition to financial numbers alone – and, our own investment experience has shown that good corporate behavior/sustainable practices can be additive to long-term returns.

It’s important that we avoid taking a perspective that is too homogenous. Financial metrics aren’t as relevant given that performance on social, environment or governance grounds will necessarily vary depending on what business sector you choose to evaluate. In biopharma, progress in meeting a real medical need is a key measure of ESG performance, and that depends on such factors as product innovation, distribution and logistics to secure access, and the price of that innovation. Such aims and criteria are impossible to harmonize across the entire industry.  If you do that, you risk losing the individual judgment necessary to evaluate what really goes on at the ground level.

It’s also true that ESG will only succeed as an institutional measure of performance if it is used and ratified by the markets. Government regulation is not the only way to secure its acceptance. ESG is a form of inclusive analysis that should rise organically due to market demand. And that demand will only come from evidence that what we are doing makes sense, from an investment standpoint as well as the value to society.


Looking Forward

(Q) What are your priorities in advancing the ClearBridge ESG agenda in the next year – the first of a new decade of change in health care?

(A) Gordon: Generally, within the ESG community itself, the major emphasis has been on interacting with the large-cap companies in health care. ClearBridge is going to give more thought to how ESG can relate effectively at the level of the small- and mid-cap players. I believe understanding the trends here and working to position companies appropriately is equally, if not more, important for them as it is for big pharma. This is particularly true for the transitioning biotechs, with real products and the accompanying responsibility for pricing, ensuring access and selling medicines. Helping them make their initial ESG steps is where I expect to spend more of my time going forward.

We have to keep on message about ESG as a long-term, evolutionary process, as opposed to the current climate, where investment decisions are pitched toward a very short-term time horizon. While the statistics indicate US stock managers have an average holding period of just 1.7 years, at ClearBridge we hold stocks an average of more than seven years. That long time horizon reflects our strategy on ESG.

The message we take to the C-suite on ESG is don’t think of it as buying into a series of extreme actions – that executing an ESG program is going to be costly, require lots of expensive outside consultants and run counter to ingrained company culture that will take years to transform. None of this is true. Our own efforts to advance ESG go back 30 years. Change doesn’t happen overnight. A successful start involves putting some focus on the three buckets (E, S and G) and thinking more about how the company’s internal processes and culture relate to the environmental, social and governance factors investors are going to be asking about – and you can be sure about that.

Looking ahead, every company has to be ready to function in a world where technology, demographics and the economics of responsible growth and investment are converging. It is impossible now to separate society from the investment community, or vice versa.

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