Ever since ESG investing was born, the “E” for environment has swallowed virtually every billion of private capital dedicated to doing good in addition to doing well. Billions flowed into green renewable energy and carbon capture, leaving even fewer private-sector resources to meet urgent social needs encapsulated in ESG’s long-ignored “S” for social. Banks thus did much to address climate risk when that was in vogue. Now that it’s not, regulators, along with banks on their own and via new ESG-investing options can mobilize private philanthropic and investment capital to reduce a problem even more urgent than global warming: suffering people.
Bill Gates last week rightly argued for a new focus: promoting public health, especially when it comes to getting proven vaccines to vulnerable populations left still more defenseless as U.S. resources are yanked from anything that smacks of foreign aid or U.S. public health. But vaccines are only part of the answer. The public good also requires the quickest path possible to successful biomedical research, preventing and treating disease if we are not to be defenseless against the next pandemic and stand by as all too many adults and children die too young or suffer too long.
How could private capital make a lot more of a contribution to this urgent ESG objective?
There is of course the philanthropic option, more than important in rare diseases where the likely profit gained from funding new treatments may not suffice to draw in biopharma funding. The banking agencies should make it clear that bank funding of or investment in early-stage biomedical research earns CRA credit and is a more than eligible public-welfare investment. There are many ways to conjoin biomedical research with community development, with support for broadening genetic diagnoses to underserved communities and creating in-community clinical research facilities just two that come easily to mind.
A recent article pointed to the “classic biotech dichotomy:” this is a “high-stakes arena where groundbreaking medical advances often walk hand-in-hand with substantial financial risk.” The same is, though, true of early-stage anything research – look at all the failed carbon-capture companies as just one case in point. Indeed, the same is true in some late-stage sectors – see the unprofitable AI companies with a combined market capitalization of $1 trillion.
How to redirect ESG investing to the S? One way is via new ESG funds. Banks and asset managers went all-out crafting new funds for climate-risk. There are more than ample opportunities to do the same for biomed. For example, ESG investing could be done via ETFs comprised of publicly-listed entities doing early-stage biomedical research or that are focused on specific conditions such as blindness, cancer, pediatric rare disease, or many others.
Banks can also put their awesome financial-engineering skills to use for early-stage biomedical funding. What about synthetic credit risk transfers that help shift funding in this sector from high-cost equity to lower-cost debt? A private fund dedicated to early-stage biomed structured for both the wholesale and accredited-investor sectors? Others?
Another option is venture philanthropy. Some biomed foundations have “venture-philanthropy funds” – see, for example, the Foundation Fighting Blindness’ RD Fund. Venture philanthropy funds use the philanthropic resources of parent foundations to gather the best scientific minds in their targeted area to identify the most promising research ready to go into the clinical trials essential to determining safety and efficacy. This stage is often called the “translational valley of death” precisely because so much sound science dies only because there isn’t sufficient funding to advance it. The credibility of a foundation’s scientists and its willingness to put philanthropic dollars at risk brings out for-profit venture capital in a 1:9 ratio that leverages scant donations in an unparalleled fashion to speed high-potential research. This is high-risk investing, but the reward is enormous not only in terms of the good that is done, but also the money that can be made.
What a great way also for wealth managers to direct high-net-worth clients looking for new ways to do both good and well. Would the wealth manager offering these options attract more clients? The scale of ESG investing suggests it would – all too many people have medical concerns or have family members at serious risk or just care a lot about alleviating suffering.
Financial innovation is all the rage and rightly so. New technologies have obliterated old products and core infrastructure, with all of this innovation focused on more profitably meeting emerging market needs. Might we not turn just a bit of this creative thinking to a vital social concern? The regulator or financial institution that does so will join those doing well by doing good.