Sustainability Sea Change: The Top 5 ESG Challenges for Pharma

Sustainability is maturing into a core element of long-term business strategy, integrating environmental and social risks and opportunities with conventional financial performance and governance concerns. As I noted in my first column for this magazine, Biopharma Sustainability Considered Essential (May 18, 2020; https://bit.ly/3z7UnIk), sustainability has a special resonance for the biopharma sector since our common mission is to achieve positive social impact through improved medicines and healthcare.

For this special “Top 50 Biopharma” issue (rankings based on prescription drug revenue), I’d like to offer a current perspective on the Top 5 sustainability-related challenges now facing leading companies, and how their responses may act as pathfinders for the rest of the sector. Most of these challenges relate to internal business processes and culture, or to collaboration and consensus-building with key stakeholders, especially investors, standard-setters, and regulators. For each challenge, I’ve provided key references for the interested reader to learn more, but be warned—sustainability is a deep and fascinating topic and these examples are not comprehensive.

Challenge No. 1 is governance, as it so often is. Integrating environmental, social, and governance (ESG) objectives into a company’s core business strategy, operations, and communications is not easy. Last June, the Biopharma Sustainability Roundtable (BSRT) partnered with Chief Executives for Corporate Purpose (CECP) to produce a Biopharma CEO Investor Forum, where 10 biopharma CEOs spoke about exactly these issues, sharing their varied approaches to sustainable long-term planning.

The impetus for companies to incorporate ESG governance, risk identification, and opportunity assessment into a more expansive view of corporate of sustainability is driven by broad social pressure—the UN’s Sustainable Development Goals (SDGs), perceived impacts of climate change, the COVID-19 pandemic, and growing participation by younger generations in wealth management. This, in turn, has driven investors and asset managers to create a wide variety of ESG or impact-oriented funds and portfolios that are meant to preferentially allocate funds to more sustainable companies. Now, lawmakers and regulators are getting involved to ensure that ESG performance information is meaningful and decision-useful for investors and society. The EU is currently a leader in this evolution, but since all large biopharma firms are global, requirements in one geography will drive widespread operational change.

Challenge No. 2 is simply tracking, contributing, and responding to the rapidly evolving landscape of ESG standards, regulations, and stakeholder expectations. With investors’ growing appreciation of non-financial performance as a key to long-term value creation, a sea change is happening in how companies are expected to measure, track, and disclose their ESG performance. My colleague Myrto Kontaxi, also a partner at BSRT, and Victoria Emerick, executive director and global head for corporate ESG-sustainability strategy and operations at Bristol Myers Squibb, recently discussed the range and progress of standard-setting, international harmonization, and new regulation that will be affecting biopharma companies as guests on Pharm Exec’s podcast, New Guidance for Biopharma Investor ESG Communications (May 26, 2022; https://bit.ly/3N7BIkb).

There are several active standard-setting and regulatory development efforts currently underway, including a US Securities Exchange Commission (SEC) proposal to enhance and standardize climate-related disclosures for investors, the first International Sustainability Standards Board (ISSB) cross-sector environmental standards, as well as the first European Sustainability Reporting Standards (ESRS), which will start coming into force next year.

Challenge No. 3 is responding effectively to social, investor, and employee demands for joining the “race to net zero.” All companies need to set and drive toward meaningful science-based targets to achieve cross-sector environmental objectives, especially for decarbonization and other climate-related impacts, and this is where the first wave of new regulatory requirements is focused. Some of the best work in this area is being done by the Science Based Targets initiative, which encourages companies to set targets and report progress based on their actual contributions to the problem and opportunities for improvement, rather than as incremental adjustments to past behavior. Many people—including me—have thought that environmental impacts are not all that important (or material) for the biopharma sector, but recent analyses like The Carbon Impact of Biotech and Pharma, from My Green Lab and Urgentum, indicate that we do have a higher-than-expected carbon impact through our Scope 3 supply and delivery chains, and through the power demands for laboratory facilities. As an industry focused on R&D and human health, we should be leading by example.

Challenge No. 4 is developing a working consensus among companies, investors, and standard-setters on how to meaningfully define, measure, and communicate social impacts that are unique to the biopharma sector. The second wave of ESG standards and regulations coming in the next one to two years will expand the range of social impact and sector-specific concerns, which for biopharma includes topics such as affordable access to medicine across markets, equitable participation in clinical trials, and the social and economic value of better healthcare infrastructure. These unique challenges and opportunities are addressed in depth in the latest Biopharma Investor ESG Communication Guidance 4.0, released in March, reflecting the outcome of an ongoing direct dialog that’s been running for the last four years between biopharma companies and investors, facilitated by the BSRT. While there’s no perfect recipe book for how companies should set their strategic ESG objectives and communicate their progress, the guidance does define the 12 highest-priority topics for both companies and investors, along with a growing set of metrics and indicators that are being shared with key standard-setters like the Sustainability Accounting Standards Board (SASB), now part of ISSB.

Challenge No. 5 requires the creation of new business models and external collaborations to meet the needs of developing markets, and to address healthcare problems that are beyond the scope of what any one company can do. Biopharma makes extraordinary investments of time, expertise, and money into new product development, but actually delivering equitable access to medicines for all patients who need them requires a different skillset. One example of innovative thinking in this area is Novartis Access, which offers a collective pricing model for a collection of existing drugs for managing key non-communicable diseases (NCDs) to governments, NGOs, and institutional customers in lower-income countries. Access Accelerated is a complementary effort to bring public and private actors together in an industry-led initiative to improve access to NCD-related healthcare services. Private, public, NGO, and government cooperation will also be needed to mount an effective response to the growing danger of antimicrobial resistance (AMR). More than 700,000 people die each year from infections resistant to most or all antibiotics, yet very few firms are actively developing new drugs in this space due to high costs and limited product lives. The increase in AMR is also a major risk factor for whole segments of current medical practice, including most forms of surgery and cancer treatments that rely on immune system suppression. The REPAIR Impact Fund, set up by Novo Holdings, is a new model for investing in this area, intended as part of a larger coordinated response that includes better medical practices, new diagnostic technology, and government action to create appropriate incentives.

I ended my first column on ESG for Pharm Exec by highlighting the concept of a “social license to operate” that recognizes the contributions of our sector and allows us to operate profitable research-based businesses on a sustainable long-term basis. And that’s where I want to end this time as well. How our largest and most visible companies address the five key challenges sketched here will strongly influence the broad social perception of our industry and will set the tone for how the myriad of smaller players are expected to operate. Sustainability is now an essential lens for everyone interested in the long-term value and contributions of biopharma to society.

Sandor Schoichet is a co-founder and partner at the Biopharma Sustainability Round-table, and director at Meridian Management Consultants. He can be reached at sschoichet@biopharmasustainability.com.