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ESG for Pharma: Fad or Megatrend?

By Sandra Sánchez-Oldenhage - PharmAdvice
President & CEO

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Sandra Sánchez-Oldenhage By Sandra Sánchez-Oldenhage | President & CEO - Fri, 08/26/2022 - 09:00

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Nowadays for many, it’s hard to think of companies as being about more than financial results. But the pandemic cast a spotlight on corporate resilience and purpose just as the climate crisis, changing demographics, social movements, emerging innovations in technology, and other forces began to re-shape expectations of business.

Consequently, ESG investing takes center stage amid economic crisis and social unrest. Environmental, Social, and Corporate Governance (ESG) refers to the three central factors in measuring the sustainability and societal impact of a company or business. The concept of a triple bottom line is increasingly relevant, as financial figures no longer tell a company’s whole story. Evaluating corporate performance not just on financial terms but also on the impact on the planet and its inhabitants is fast becoming the norm. ESG has become shorthand for the risks and opportunities that could impact a company’s ability to create value in the long term and how the company is managing those risks and taking advantage of those opportunities to ensure its long-term economic stability.

This evolution in corporate responsibility has undoubtedly been hastened by the pandemic – and the suddenly unveiled fragility of global systems. The increased focus on ESG has been further heightened by the expectations and public demand of stakeholders. ESG has risen in importance to the level of critical business issues, increasingly seen as the measure of sustainability and resilience of an organization. The criteria are progressively being used to inform strategic goals, operational execution, and the reporting of sustainable business practices to key stakeholders and customers.

ESG investing has now become vital for investors as they have seen how the stock price of ESG-focused companies has become more stable, outperforming those with low ESG rankings. Such a statement confirms that companies that are highly oriented in ESG can expect high returns.

Moreover, ESG not only helps businesses by attracting a more diverse workforce to bring in new ideas but it also helps businesses have a greater positive impact on our world. Consequently, ESG creates value by facilitating top-line growth in the long run, attracting talent and increasing employee productivity, reducing costs, minimizing legal and regulatory exposure or intervention, optimizing investment and capital expenditures, and ultimately forging a sense of trust among consumers.

The life sciences sector, of all industries, is not the exception. The COVID-19 pandemic disrupted norms across society and forced everyone to question nearly every aspect of their lives; it forced the industry to question and become closer to their purpose and commitment to society – a pandemic-inspired reckoning, of course. Since then, companies have expanded their environmental goals, boosted diversity and inclusion goals, and recommitted to social justice and healthcare equity. Many have set out new social pledges over the past year.

ESG initiatives and increased disclosures are now becoming key contributors to sustainable access, to quality healthcare and medicines, and they are moving out of the corporate periphery and into core business aspects. The ESG movement encompasses several factors critical to success and focuses on a blended long-term portfolio of purpose, planet, and people – showcasing companies’ social investments and proving their commitment to global medicine access and equity concerns.

It is widely accepted that ESG performance can give biopharma companies a competitive advantage among their peers and is relevant to how successful a company will be in the future, but the pharma industry has some differences when it comes to ESG evaluations.

Much like the oil and gas industry, where environmental concerns overwhelm the rest, pharma has an omnipresent black-cloud issue drug pricing that tends to sway ESG evaluations. However, while pricing is the thing that continues to undermine the perception of pharma’s ESG stance, it doesn’t mean that’s the only thing it should focus on.

Despite designing, developing, and manufacturing thousands of life-saving drugs that have revolutionized public health, the positive societal impact of these products has often been tarnished by the perceived “unethical behavior driven by corporate greed.” Pharma has historically been vilified and penalized on issues such as exposure to litigation (e.g., opioids), corporate behavior (e.g., price gouging, noncompliance issues, irresponsible marketing), product safety and recalls, or issues with access to affordable healthcare. However, momentum in pharma ESG investing is improving as these risks evolve. The halo of strong ESG ratings/efforts could serve to moderate some of that pressure. Research shows that in the healthcare sector, companies with stronger ESG assessments have outperformed over time.

ESG is a key factor during a crisis in determining how well a company will perform in the public eye and ultimately impacting its corporate reputation. It can determine whether people trust a company to do the right thing and continue to buy its products. Having strong ESG perception scores can go a long way in helping a company weather a crisis, that we know today, can come anytime and when we least expect it.

Pharma has landed a most-improved industry rating year over year since the pandemic and ESG formed the backbone of its stronger-than-usual performance. In fact, its ESG ranking was the highest among 25 industries surveyed by RepTrak, which attributed pharma's gains heavily to the halo effect from the quick trip to market and high efficacy of the COVID-19 vaccines.
Above and beyond this component, the dominant themes addressed by many larger biopharma companies in their published ESG reports included addressing climate change and environmental impact, fostering diversity and inclusion initiatives, and managing human capital.

Regarding climate change and the environment, most biopharma companies have focused their attention on how they can reduce their carbon footprint. Nevertheless, companies should also be looking at conserving and reducing water and greenhouse gas emissions, improving air quality, continuous manufacturing versus piecemealing in different locations, among others. In other words, environmentally conscious business practices.

Social investing has surged again during the past 12 months, with renewed Black Lives Matter advocacy, Pride month and the COVID-19 pandemic’s disproportionate effects on racial and ethnic minority groups. With all these prominent social movements actively fighting against institutional and systemic racism, it should not be hard for biopharma companies to develop cultural intelligence and to recognize the leadership role they play in building and motivating others to build diverse and inclusive workspaces. Furthermore, they should be working on strategies to effectively manage human capital – training and career development, strategies for talent recruitment and retention, employee engagement, community impact, etc. Additionally, going beyond the company realm, many have established a supplier code of conduct for all its vendors, thus expanding its social impact.

The governance piece, however, is always less discussed and even overlooked, though the pharma sector is highly regulated. It includes everything from who serves on a company’s board to executive pay levels, to the rules and processes that define how a company runs. It relates to internal practices and policies that lead to effective decision-making and legal compliance. This pillar is dependent not only on regulatory frameworks and external initiatives but also the willingness of pharma companies to commit to meaningful action, regulatory compliance, transparency in sharing data about their activities, quality standards, and ethical business practices. Yet, the industry is making great efforts to improve its performance against the governance metric.

Regrettably, within the three pillars of sustainability, we essentially still do not see pricing issues being proactively addressed in any ESG reporting from life sciences companies, despite it having played a role at hindering access to drugs and healthcare. Pricing took a back seat during the pandemic as the hero's race to find vaccines and treatments cast a positive glow over the entire industry, but drug price increases didn't go completely unnoticed and pressure to link pricing to value and outcomes will not go away either.

This is a concern that needs the entire industry to take the front seat, with the patient and society at the center, bringing stakeholders together and finding a win-win solution. It will become front and center at some point soon and a proactive stance versus a reactive one will always ensure a better outcome: collaborating on the solution rather than waiting for governments and regulatory agencies to take charge. Leading this endeavor will go a long way for whoever takes that center stage. Calling for the fundamental transformation of our healthcare system is critical and one that has started with pushing for value-based pricing. We need to transition to a system that is more accessible for all patients and uses value and outcomes criteria to determine how treatments are priced and reimbursed. Companies need to expand their commitment to value-based models of care by calling for a system shift that links drug pricing and patient access to the value they provide patients. There is no other way for a healthcare system to become sustainable.

Good pharma citizenship is evolving and will go beyond environment and social impact. ESG will need drug pricing input at some point. Maybe partnering with an independent drug pricing assessment organization (for example, the Institute for Clinical and Economic Review, or ICER) to find a way in which they could play a role in helping investors determine ESG value and investment worthiness, thus determining good pharma corporate citizenship. Value-based pricing pegs the cost of a drug directly to patient outcomes, while ICER seeks to determine cost-effectiveness valuations; as a result, they become complementary. A front-footed approach in the shift toward fairer pricing and access to medicine will set the stage for strong performance going forward.

This can undoubtedly be done. COVID was a tipping point for the industry and despite vaccine development usually taking more than 10 years, pharmaceuticals were able to successfully collaborate to produce and distribute highly effective jabs in a fraction of the time in many cases on a nonprofit basis to low- and middle-income countries, demonstrating that the industry can move from a profit-centric approach toward a strategy that maximizes societal impact, a move that in today’s world is valued by all stakeholders and consumers. 

In summary, creating long-term value requires companies to understand the impact of their strategies on key stakeholders – investors, employees, customers, communities – and the natural resources and supply chains on which the company relies. Considering a company’s total impact means that both companies and boards need to take a fuller view of ESG. It is no longer possible to sit on the sidelines when it comes to ESG, as business interests are increasingly intertwined with the outcomes of philanthropy and public accountability. It’s an issue all pharma companies should be thinking about – today. It is clear it isn’t a passing fad but rather a megatrend, and there are inherent risks if not tended to.

ESG is a critical driver to capture opportunity, keep ahead of vulnerability and thrive. Its goals are a business fundamental and should not be viewed as just a mandatory compliance requirement or the right thing to do. They're demanded by patients, consumers, customers and even investors. While the Securities and Exchange Commission does not currently mandate ESG disclosures, the reality is that societal forces are increasing pressure on companies to make this a priority and share what they are doing. Consumers, investors, employees, and Gen Z will likely bring different expectations related to sustainability, society, technology, ethics, and the role of private companies in providing public goods. These expectations are radically evolving and will need to be understood and addressed if a company wants to prosper.

Moreover, given the nature of our industry, beyond the bottom-line impact, ESG strategies will likely continue to grow as a way for pharma to serve patients and customers as well as contribute to global society. We have the responsibility to back up our mission, our purpose and even our words with real actions centered on collaborative initiatives and a proactive stance. For pharma companies and their supply chain partners, ESG brings many pressing challenges but also many opportunities to make a difference, enhance profitability, reputation, and long-term sustainability.

Photo by:   Sandra Sánchez-Oldenhage

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