Life Sciences, ESG and the Building Blocks of a Sustainable Business

Thanks to its role in developing products and services that improve public health, the life sciences industry provides the purpose that is seen as so important to today’s investors and potential employees. As a result, it goes some way to fulfilling the criteria for the “social” aspect of the Environment, Social and Governance principles increasingly guiding corporate behaviour. Indeed, it is estimated that $120 billion was put into sustainable investments in 2021, more than double the amount the year before. While such funds retreated for the first time in a decade last year because of political and economic uncertainties, it is generally accepted that ESG is here to stay and that the trend of related investment will continue upward.

Focus on the social

Biotech companies cannot rest on their laurels, though. The sector is not seen as a leader in this area. Research by the law firm Fenwick & West reported by the Harvard Law School Forum on Corporate Governance last year found that ESG reporting among biotech companies was “limited and there is no consensus on where or what to report.” Moreover, analysis by professional services firm PwC’s Health Research Institute indicates that pharmaceutical and life sciences companies have focused much more on what it calls “the social pillar” rather than the other two elements. But even here there is work to be done. Among other things, companies in the sector need to be doing more to protect and promote a diverse workforce and to maintain supply chains that comply with best practice.
The real challenges, however, lie with the environmental and governance elements.

Biotech companies of all sizes will have to focus more than hitherto on the composition of their managements and boards

The Environment

The Environmental pillar is relatively straightforward to apply to life sciences, with the focus on the importance of mitigating environmental impact by reducing greenhouse gases or controlling bio waste. Concerns range from supply-chain logistics and single-use equipment to the disposal of bio-hazard materials.
The Biopharma Investor ESG Communications Initiative sets the best practices to introduce ESG in the life sciences, biopharma industry. According to their guidance document, the initiative’s goals are to address the common interest of companies and investors in achieving more effective, efficient, and decision-useful communications about the sector’s most important ESG topics.

Reputational risk

When it comes to the governance side, the industry obviously has some experience on which to draw. Its activities are heavily regulated and it has been exposed to press coverage of such ethical issues as genetic modification, stem cell research and the availability of addictive opioids. But as not just investors and employees but the wider community, including consumers and governments, pay increasing attention to ESG metrics, biotech companies of all sizes will have to focus more than hitherto on the composition of their managements and boards and on their behaviour in general. Among ethical considerations the pricing of drugs and therapies is becoming increasingly sensitive, and companies will need to have answers or risk seeing their reputations suffer.
One of the reasons often cited for biotech companies’ failure to engage fully with the ESG programme is the difficulty of making comparisons between different entities’ performance as a result of the plethora of standards and guidelines. However, this argument is becoming weaker as moves to consolidate standards under the Sustainability Accounting Standards Board gather pace. Moreover, the European Union is already working on extending mandatory ESG reporting from the financial sector to all large companies and small and medium sized companies listed on regulated exchanges and similar moves in the U.K. and the U.S. are seen as inevitable.

Among ethical considerations the pricing of drugs and therapies is becoming increasingly sensitive, and companies will need to have answers or risk seeing their reputations suffer.

Business imperative

The industry appears to realise the way the wind is blowing, with executives and investors alike agreeing that ESG disclosures should be mandated in order to provide consistency and standardisation. A study by Paul Hastings on what ESG means for life sciences concludes: “ESG is no longer a corporate social responsibility ‘nice to have’; rather, it is a business imperative. Life sciences companies must understand their exposure and meaningfully integrate strategic solutions, or face competitive retribution and regulatory scrutiny.”
More to the point perhaps, given the increasing importance attached to ESG principles by the financial community, businesses that embrace the concept and strive to meet the highest standards will be much more attractive than their counterparts to the investors who provide the funding that’s vital for the development of the products and services on which the world depends. In the end, ESG is all about creating genuinely sustainable enterprises on the basis that businesses that display strong ethics, commit to reducing their environmental impact and seek to improve society tend to be better run — and hence more successful.