Key Strategies for Businesses, Meaningful Changes for Communities

New regulations pave the way for updated ESG considerations.

Once seen as a differentiator for early adopters, a focus on environmental, social and governance (ESG) practices has become an essential part of any company’s business model and strategy.

While some may dismiss ESG as mere fad or greenwashing for advertising, the reality is that ESG is not focused on signaling value but on establishing practices that support risk mitigation, corporate longevity, talent development and transparency, all of which can lead to improved organizational performance. Many life science organizations, including biopharmaceutical companies, agree with this premise, but they may not have formalized processes in place to improve their current ESG practices.

Here, we explore how emerging regulations may impact biopharmaceutical companies and their ESG considerations, provide insights into where the life sciences industry has already established an ESG stance, and highlight areas where leaders may want to focus their attention on the short term and formalize their efforts more.

The DRY elephant in the bedroom

It’s no secret that access to capital markets is a primary goal for most life science companies, as it can provide the capital needed to bring game-changing new drugs and devices to society. life. We also know that access to this capital requires increased levels of monitoring and reporting. Proposed rules by the U.S. Securities and Exchange Commission (SEC) to improve and standardize climate-related disclosures have sparked new discussions about ESG initiatives, not only by public companies, but also by their private counterparts who include the possible downstream impact of any measures adopted. .

Standardization of environmental reporting, risk assessment and use of a consistent framework are some of the main objectives of the proposed standard, which would impact large accelerated filers in 2023, accelerated and non-accelerated filers in 2024, and smaller companies filers in 2025. For context, we analyzed data from Bloomberg public flyers and, as of March 31, 2022, approximately 135 pharmaceutical and biotech companies on US exchanges qualify as large expedited filers, and 335 others qualify as expedited filers. The majority of these companies do not report on ESG or have limited information in only one of the three pillars (environmental, social or governance). This does not mean that biopharmaceutical companies are lagging behind their broader economic counterparts, but aims to make biopharmaceutical leaders aware that their companies will have an important role to play in the future of ESG reporting. Standards set by established biopharmaceutical companies (representing approximately 8% of U.S. public companies with a market capitalization greater than $50 million) will set the benchmark for an active cohort of biopharmaceutical startups that have represented approximately 30% of all non-IPOs. listing of special purpose acquisition companies (SPACs) over the past five years.

Based on initial responses from industry leaders, we anticipate a vigorous pushback on the SEC’s proposed rules, particularly the “Scope 3” emissions guidelines, which would require reporting of emissions resulting from activities that are not controlled by the reporting entity. These rules would pose a major challenge to life sciences supply chains and operating models that are increasingly globalized and decentralized. That said, many global economies have already established ESG reporting requirements (e.g. the European Union), and a growing number of manufacturing hubs in Asia and Oceania are announcing ambitious net-zero emissions targets.

Biopharma executives and boards can view this as an opportunity to learn more about the different ESG reporting frameworks used by their peers and partners; take stock of the efforts already underway; and solidifying practices that will mitigate risk, increase transparency and drive social, investor and workforce engagement.

Building on solid foundations

Alex Kotsopoulos, a partner in RSM’s ESG Strategy Consulting Group, has been helping companies realize their ESG vision for over a decade. Over the past year, he has been on a roadshow to talk with RSM’s life sciences clients about formalizing ESG into their strategy. Without fail, 10 minutes into every conversation there’s a moment where he has to reassure company executives that they’re not behind the eight ball and that they’re well ahead of what they believe to be in ESG matters, especially in the life science space.

The reality is that the fundamentals of ESG are embedded in the DNA of many life science companies. Develop and produce products that support the health and well-being of individuals, strive to increase efficiency and reduce costs so that therapies can reach patients quickly and inexpensively, embrace transparency so that patients can better understand the drugs or devices they are using, and navigate a highly regulated and often politically charged atmosphere are all inherent standards of the life sciences.

We also know that many biopharmaceutical companies recruit and hire diverse people, are in tune with social and economic trends that impact the well-being of the communities they serve, recognize the challenges of competition for talent, and investments, and are used to navigating and securing large amounts. data and identifying relevant targets and actions. Combine all of this and you have a substantial basis for an ESG strategy.

To be clear, however, taking stock of what a company is already doing on ESG is just the start. The most critical effort is aligning the company’s vision and values ​​with a formal ESG strategy and identifying the measures and actions needed to achieve those goals. Having clarity in this phase is essential because of the transparency that may not only be required, but will be expected by clients, investors and talent.

Where do we go from here?

According to RSM’s Middle Market Company Index Special Report on ESG Q3 2021, when middle market leaders were asked about their organization’s motivations for adopting ESG, the reasons covered a wide range. range of considerations and stakeholders.

Although the reasons may vary, effectively pursuing an ESG strategy in support of the business means a formalized approach and, in many cases, a measurement of the return on investment of the policies and programs put in place. Formalization can begin by compiling a universe of predominant environmental, social and governance concerns found in the specific sector of the organization and at a broader industry level. The following list is not exhaustive but illustrates some key considerations:

  • Address greenhouse gas emissions from your operations as global economies move towards carbon neutrality. There is a financial benefit to this as many countries are rapidly increasing carbon taxes (e.g. Singapore going from $5/tonne to $80/tonne over the next decade).
  • Managing the sustainability and carbon footprint of supply chains. This has become increasingly important for life science companies that have offshored parts of their operations. The process of assessing the carbon footprint of a supply chain often reveals significant opportunities in terms of cost, efficiency and logistics.
  • Establish more stringent wastewater and contamination targets, especially for operations that have significant production of medical devices or chemicals (including active pharmaceutical ingredients).
  • Develop strategies to ensure affordable and equitable access to medicines, therapies and products.
  • Implement product safety and social benefits, considering cost and distribution.
  • Facilitate clinical trial diversity and support for traditionally underserved or underrepresented populations.
  • Select vendors, suppliers and customers who reflect the company’s ESG brand and mission.
  • Position the organization and its values ​​in light of social and political issues, at home and abroad.
  • Implement culture, diversity and inclusion efforts across the business to attract and retain talent.
  • Establish formal roles and/or committees to lead ESG efforts and serve as a central point of contact.
  • Participate in groups and working groups between peers and the community to solicit suggestions, feedback and best practices, and create an additional level of accountability and transparency.
  • Actively select and report on the company’s ESG efforts. This should be considered in the context of various established frameworks that are used nationally and internationally.
  • Integrate the company’s ESG efforts into its recruitment and employment practices, as well as establish formal policies and procedures.

Logical and regular steps towards formalization

Biopharmaceutical leaders have turned to ESG for years as a natural adaptation to economic, technological and societal changes. Now, to formalize the approaches, business leaders need to take stock of what they are already doing and what their values ​​and visions are, then overlay that with an established framework that best aligns with their industry peers. From then on, they should set renewed goals, make intentional plans, and transparently track progress.

Since ESG is an iterative process, companies will need to solicit feedback and remain accountable to stakeholders, and identify areas where efficiency and effectiveness are or are not being achieved.

For many biopharmaceutical companies, formalizing an ESG process can bring rewarding benefits to the organization and culture, and, more importantly, can address community challenges and create meaningful change for generations to come. .

Adam LohrSenior Life Sciences Analyst, RSM US LLP

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