ESG Trends and Practices in the Biopharma Industry

As the world starts to adjust to life after the COVID-19 pandemic, companies in general have focused greater attention on developing and strengthening their environmental, social, and corporate governance (ESG) initiatives in order to bolster their societal impact on their community, reform their environmental impact, and boost their chances of long-term growth and success that benefit both the companies and their investors.

Biopharmaceutical companies were no exception. They were very much in the limelight during the pandemic because of their ability to conduct research and develop and manufacture treatments and therapeutics for life-threatening and/or rare diseases and chronic conditions, including developing COVID-19 vaccines. Because of the attention ESG has received and will continue to receive in the following years from investors, employees, patients, and other stakeholders, the larger biopharma companies have used their extensive resources and capital to create committees and teams responsible for assessing, improving, and in many cases creating and implementing new and effective ESG practices and initiatives.

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. The larger companies have banded together to form a Biopharma Investor ESG Communications Initiative, which developed the Biopharma Investor ESG Communications Guidance 2.0 (the Guidance). According to the Guidance, biopharma companies should prioritize the following ESG topics: access to healthcare and medicine pricing; business ethics, integrity, and compliance; climate change; clinical trial practices; ESG governance; environmental impacts; human capital management; innovation; pharmaceuticals in the environment and antimicrobial resistance; product quality and patient safety; risk and crisis management; and supply chain management.

Over this last proxy season, the dominant themes addressed by many larger biopharma companies in their published ESG reports include addressing climate change and environmental impact, fostering diversity and inclusion initiatives, and managing human capital. By looking at the most recent proxy statements, ESG reports, and company websites, it appears as though these companies are devoting the most resources to strengthening these core ESG areas.

When looking at public disclosures, it is important to recognize that many of the statements provided in public filings that describe climate change and environmental impact, diversity and inclusion, and human capital management ESG efforts and initiatives are crafted as forward-looking statements to reduce exposure to claims that what they are actually doing falls short of their stated aspirational goals.

In regard to climate change and the environment, most biopharma companies have focused their attention on how they can reduce their carbon footprint. For example, these companies have stated that they aim to conserve and reduce water and greenhouse gas emissions. For the most part, we see that big companies are able to actually demonstrate how they have conserved resources and reduced use of harmful emissions by providing exact percentages of conservation and reduction. Given the nature of reducing environmental impact, it is common for big biopharma companies to include forward-looking statements when describing their future goals because it is understandably hard to reduce the use of greenhouse gas or improve energy efficiency in one year.

After the murder of George Floyd, there has been a stronger push for continuous efforts to address systemic racism and to increase diversity and inclusion in the workplace. Many of the larger companies have expressed their commitment to fostering diverse and inclusive workplaces for their employees and have stated that they will recruit eligible candidates from a diverse pool of applicants and will be intentional about hiring diverse candidates for senior and high-ranking positions. Furthermore, some companies have taken the additional step of funding science programs and mentorship programs in underserved communities in order to increase representation of women and minorities in the biopharma industry.

With prominent social movements actively fighting against institutional and systemic racism, it should not be hard for big biopharma companies to develop cultural intelligence and to recognize the leadership role they play in building and motivating others to build diverse and inclusive work spaces; however, there are varying degrees to which big biopharma companies have taken meaningful action to improve their diversity and inclusion efforts. While some companies have actually hired a Chief Diversity Officer to lead their diversity and inclusion initiatives, other companies have simply made only generic statements about being committed to improving diversity and inclusion in the workplace.

Another key theme focused on by biopharma companies is the need to manage human capital. According to the Guidance, human capital management includes “training and career development, strategies for talent recruitment and retention, and diversity and inclusion.” Over the last few years, larger companies have focused on providing their employees with the tools and resources they need to further grow and develop in the industry. In many public disclosures about how they support their employees’ professional development goals, big companies tend to provide details on their mentorship programs, training programs, and career development programs. With respect to diversity and inclusion, big biopharma companies tend to follow the trend of providing the racial and gender composition of their Boards of Directors and Leadership Teams to show that they are dedicated to fostering a diverse and inclusive company.

The biopharmaceutical market is segmented on ESG disclosures between the larger biopharmas and other biopharma companies based on the public profile, levels of revenue, and growth rates of the companies. In particular, mid-size and small public or private companies that are just doing research and development and do not have commercial products in the market tend to have leaner ESG initiatives than the larger companies because they do not have the same level of resources as the larger companies and tend not to be under the same external pressure from investors and other stakeholders with respect to ESG.

Mid-size biopharma companies tend to recognize the emerging trends of climate change and environmental impact, diversity and inclusion initiatives, and human capital since they publicly discuss these issues in their SEC filings and on their websites. Furthermore, top mid-size biopharma companies usually provide as much information as big pharmaceutical companies on their ESG initiatives, specifically their environmental impact, diversity and inclusion, and human capital management efforts. In comparison, lower-ranked mid-size biopharma companies express their commitment to reducing environment impact, maintaining a diverse and inclusive culture, and helping employees with their professional development; however, they do not provide nearly as much information as do the larger companies about the practices and methods they use or will use to improve or fortify their ESG goals. Unsurprisingly, these companies tend to use broader, more generic, and aspirational language when discussing their commitment to the environment, diversity and inclusion, and human capital management.

Compared to big and mid-size pharmaceutical companies, small biopharma companies tend to struggle the most with keeping up with emerging trends in the industry because of the lack of resources, capital, and time they have to commit to proactively developing and strengthening ESG policies. Because making ESG disclosures often involves numerous departments, including accounting, human resources, governance, investor relations, and legal, small companies that do not have well-established and separate internal departments tend to avoid making ESG disclosures early on.¹

However, it may be time for these smaller biopharma companies to start thinking of ways to incorporate low-risk and simple ESG initiatives in their business because ESG is going to remain a hot topic for a while and investors, other stakeholders, and possibly the regulators will begin to focus their ESG demands on them.

Small companies that want to develop an ESG program should start the process by defining their ESG goals and identifying the ESG initiatives that their peers and competitors tend to focus on. They should consult with their C-suite executives and board, internal stakeholders, third parties, and advisors to ensure that the ESG topics that they want to report are connected to the company’s long-term value strategy. In addition, it is important for them to openly communicate the strategic importance of ESG goals with their disclosure team. In practice, there should be active discussions about developing disclosure and reporting policies and procedures.

Because the current ESG disclosure framework is fractured, with no standardized disclosure, small biopharma companies should ensure that the language used in their reports can be easily compared to what their peers are saying. Legal counsel should be involved early on to ensure that ESG disclosures are properly validated and qualified. By following these best practices for ESG reporting, small pharmaceutical companies will be in a better position to develop ESG programs that will help such companies achieve sustainable growth in the future.

Carl Valenstein is a partner with Morgan Lewis and co-leads the firm’s Environmental, Social, and Governance (ESG) & Sustainability team. Shabeena Sharak, a summer associate with the firm, contributed to the development of the column.

Reference

1. A Survey on Sustainability Disclosures by Small and Mid-Cap Companies, Harvard Law Forum on Corporate Governance, Harvard L. Sch. F. Corp. Governance (Mar. 5, 2021), https://corpgov.law.harvard.edu/2021/03/05/a-survey-of-sustainability-disclosures-by-small-and-mid-cap-companies/.