The opioid crisis is making its way into the “S” and “G” of ESG-focused investments.
A growing number of institutional investors are pursuing policy changes at drugmakers and distributors to help mitigate the crisis, with some success.
Using shareholder resolutions and direct communications with corporate executives, they are pushing for better oversight of financial and reputational risks related to the opioid crisis.
A coalition of state treasurers overseeing public pension funds, health and welfare union funds, faith-based investment funds and asset managers, called Investors for Opioid Accountability (IOA), with a combined $1.3 trillion in assets, for example, has filed 35 resolutions at 12 companies related to the opioid crisis. These include resolutions to separate the roles of CEO and chairman to foster better oversight, clawbacks of executive pay due to misconduct relating to the opioid crisis and requests for regular risk reports from the board.
As a result of these efforts and efforts by individual members of the coalition, Cardinal Health, a distributor of opioids and other medications, agreed to separate the roles of CEO and chairman and create an ad hoc committee of independent directors of the board to assist the Board in its oversight of opioid issues. McKesson, another distributor of opioids and other medications, also committed to separate the CEO and chairman roles when the current CEO retires and committed to review its pay practices.
But AmerisourceBergen has so far refused to adopt any of three shareholder proposals related to reducing opioid-related risks even though roughly 60% of independent voters (excluding Walgreens, which owns 26% of the company), approved of two of the proposals and 49% approved of a third.
“We’re asking companies to improve their governance and accountability,” says Maureen O’Brien, vice president and corporate governance director at Segal Marco Advisors, a financial consulting firm servicing more than 600 clients with combined advisory assets topping $500 billion, and member of the IOA. “We want companies to be proactive, in seeing their role as doing everything they can to mitigate the risks of being involved in this epidemic.”
The epidemic is killing thousands of people every year. Opioid abuse accounts for two-thirds of the 63,600 drug overdose deaths per year in the U.S., which is the leading cause of death for people under 50, according to the Centers for Disease Control. Opioids include such drugs as heroin, fentanyl and oxycodone.
In addition, more than 2 million Americans are addicted to opioids and millions more abuse them, according to the U.S. Department of Health and Human Services.
Opioid-related deaths and addictions have led to lawsuits by state governments and the Cherokee Nation against drug manufacturers for misleading advertising and marketing and against drug distributors for failing to carefully monitor supply chains, in violation of the law. Settlements have cost companies tens of millions or hundreds of millions of dollars.
“Drug or health care companies that make or distribute opioid drugs face growing potential liability from lawsuits along with regulatory, medical and public pressure to drastically reduce their use,” says Jon Hale, global head of sustainability research at Morningstar.
Timothy Smith, director of ESG shareowner engagement at Walden Asset Management, which manages about $8.5 billion in assets and is also a member of IOA, says the opioid epidemic is an issue that concerns not only governments and policymakers but also individual families who have suffered through the deaths and addictions of family members. “This is a grass-roots issue, not just a one of nerdy corporate governance.”
But it is increasingly an issue of corporate governance as well as social impact.
“From an ESG investment standpoint, the focus is on factors that are materials to a company’s financial performance that may be overlooked or undervalued in a traditional financial analysis,” says Hale.
“I expect all investors to be interested in how the opioid crisis is impacting public firms like drugmakers Teva Pharmaceuticals, Insys Therapeutics and Mallinckrodt, and distributors like McKesson Corp., Cardinal Health and AmerisourceBergen — all named in lawsuits.”
Except for Teva, all these stocks have lost value year-to-date led by Insys, which has fallen 40%. The Food and Drug Administration on Friday decided not to approve the company’s under-the-tongue opioid spray formulation to treat moderate-to-severe pain, citing potential safety concerns, which cause the stock to plummet 9% that day.
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