Can Pharmaceutical Companies Be Considered ESG Stocks?

While the purpose of medicine is generally meant to heal, and is a noble deed, there are some externalities related to the drug industry that are not so healthy for people, communities or the sustainable economy. Animal testing and potential addiction and dependence (such as with opioids), have left the public wondering if one can call any pharmaceutical company truly “sustainable, responsible and impact” focused?

Is that really the case?

Ethical investing ultimately comes down to one’s personal moral and ethical beliefs, so on the one hand, pharmaceuticals could be included in an SRI investor’s portfolio who truly beleives they provide more good than harm, or vice versa. For example, devout Catholic investors may be fine with companies that produce drugs to treat HIV but if they produce birth control or morning-after pills, that’s another story.

Calling pharmaceuticals, or even the healthcare sector, appropriate for SRI clients is a bit of a stretch. However, the point here is that if you are considering a drug/healthcare company for your portfolio, and you are trying to engage in SRI or impact investing practices, it helps to fully understand what drugs the company has/had made and what conditions they are designed to treat.

You also need to ask yourself, to what extent do these drug offerings bother you? For instance, back to the devout Catholic example again, a drug company may have only 1% of their entire business devoted to the development of contraceptives. It’s a small percent, yet it is nonetheless a percentage of the broader business. How much does that fact bother you? Does it bother you enough to avoid the stock altogether, or would you possibly consider it?

According to Investopedia, “Ethical investing is the use of an investor’s ethical principles as the main navigational tool when seeking out potential investments. Investors with a rigid set of principles may choose to steer clear of the pharmaceutical industry entirely. However, companies that produce natural supplements or drugs that aid in combating diseases such as Alzheimer’s or cancer may not conflict with the investor’s beliefs.

In the financial world, ethical investing and socially conscious or socially responsible investing are used interchangeably. However, a socially responsible investment is arrived at by using a standard and broader set of guidelines, where ethical investments commonly involve a greater degree of individuality when selecting securities.”

Additionally, Investopedia notes that “As with any type of investing, there are benefits and drawbacks for the ethical investor. For individuals who live by a certain moral code or standard, investing that follows suit seems like a logical step. There are also emotional perks. Companies that fall in line with an individual investor’s personal beliefs and that also perform well in the market provide emotional reassurance as well as financial benefits.

Ethical investing can pose challenges for investors, as investments that meet an investor’s personal criteria perfectly can be difficult to find. Ethical investors may face difficult decisions involving some type of compromise to their principles, particularly if those principles are strict. Ethical investors are likely to spend a significant amount of time and energy locating investment opportunities that line up satisfactorily with their standards.”

Use your noggin and make sure that value = values for ALL SRI focused clients or for yourself if you are trying to be a green investor.