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New regulations set stage for updated ESG considerations.
Once considered a differentiator for early adopters, a focus on environmental, social, and governance (ESG) practices has become an essential component of any company’s business model and strategy.
While some may dismiss ESG as simply a fad or greenwashing for publicity, the reality is that ESG is not focused on value signaling but on establishing practices that support risk mitigation, business longevity, talent development, and transparency, all of which can lead to improved organizational performance. Many life sciences organizations, including biopharmaceutical companies, agree with this premise, but they may not have formalized processes in place to enhance their current ESG practices.
Here, we explore how emerging regulations may impact biopharma companies and their ESG considerations, provide insights as to where the life sciences industry has already established an ESG foothold, and highlight areas where executives may want to focus their near-term attention and further formalize their efforts.
It’s no secret that access to capital markets is a primary goal for most life sciences companies, as it can provide the necessary capital to bring new life-changing drugs and devices to society. We also know that access to such capital requires increased levels of scrutiny and reporting. The US Securities and Exchange Commission’s (SEC’s) proposed rules to enhance and standardize climate-related disclosures have spurred further discussion of ESG initiatives, not only by public-reporting companies but by their private peers who understand the eventual downstream reporting impact of any measures passed.
Standardization of environmental reporting, evaluation of risks, and use of a consistent framework are some of the primary goals of the proposed standard, which would impact large-accelerated filers in 2023, accelerated and non-accelerated filers in 2024, and smaller reporting companies in 2025. For context, we analyzed public flier data from Bloomberg, and as of March 31, 2022, approximately 135 pharma and biotech companies on US exchanges qualify as large-accelerated filers, and another 335 qualify as accelerated filers. The majority of these companies do not report on ESG or have limited disclosures in only one of the three pillars (environmental, social, or governance). This does not imply biopharma companies are behind their broader economic peers but is meant to raise awareness among biopharma leaders that their companies will have a large role to play in the future of ESG reporting. The standards that are set by established biopharma companies (representing about 8% of US public companies with a market cap greater than $50 million) will serve as the benchmark for an active cohort of biopharma startups that have accounted for roughly 30% of all non-special purpose acquisition company (SPAC) IPOs over the last five years.
Based upon initial responses from industry leaders, we anticipate robust pushback on the proposed SEC rules, specifically the “Scope 3” emissions guidelines, which would require reporting on emissions resulting from activities that are not controlled by the reporting entity. These rules would be a major challenge for life sciences supply chains and operating models that have become increasingly globalized and decentralized. With that said, there are many global economies that already have established ESG reporting requirements (for example, the European Union), and a growing number of manufacturing centers in Asia and Oceania are announcing aggressive net zero emissions targets.
Biopharma leaders and boards of directors may consider this an opportunity to learn about the various ESG reporting frameworks that are being used by their peers and partners; take stock of what efforts are already underway; and solidify practices that will mitigate risk, increase transparency, and drive more social, investor, and workforce engagement.
Alex Kotsopoulos, partner in RSM’s ESG strategy consulting group, has been helping companies realize their ESG vison for more than a decade. Over the past year, he has been on a roadshow talking with RSM’s life sciences clients about formalizing ESG into their strategy. Without fail, 10 minutes into every conversation, there is a point where he must reassure the company’s leaders that they are not behind the eight ball and that they are well ahead of where they think they are when it comes to ESG, especially within the life sciences space.
The reality is that the core tenets of ESG are embedded in the DNA of many life sciences companies. Developing and producing products that support the health and wellbeing of individuals, striving to increase efficiency and reduce costs so that therapies can reach patients quickly and affordably, embracing transparency so that patients can better understand the drugs or devices they are utilizing, and navigating a highly regulated and often politically charged atmosphere are all inherent life sciences standards.
We also know that many biopharma companies recruit and hire diverse individuals, are in tune with social and economic trends impacting the welfare of the communities they serve, recognize the challenges of competing for talent and investment dollars, and are accustomed to navigating and securing large amounts of data and identifying relevant targets and metrics. Combine all of this, and there is a substantial base for an ESG strategy.
To be clear, however, taking stock of what a company is already doing in terms of ESG is only the beginning. The most crucial effort is aligning the firm’s vision and values with a formal ESG strategy, and identifying which measures and actions are necessary to achieve those goals. Having clarity in this phase is critical because of the transparency that may not only be required, but will be expected by customers, investors, and talent.
According to RSM’s Middle Market Business Index special report on ESG in Q3 2021, when middle market executives were asked about their organization’s motivations for embracing ESG, the reasons spanned a wide range of considerations and stakeholders.
While the reasons may vary, effectively pursuing an ESG strategy in support of the business means a formalized approach and, in many instances, return on investment measurement on the policies and programs put in place. Formalization can start by compiling a universe of prevalent environmental, social, and governance concerns found in the organization’s specific sector and on a broader industry level. The following list is not exhaustive but illustrates some top considerations:
Biopharma leaders have been moving toward ESG for years as a natural adaptation to economic, technologic, and societal changes. Now, to formalize approaches, business leaders should take stock of what they are already doing and what their values and visions are, and then overlay that with an established framework that best fits their industry peers. From that point, they should set renewed goals, make intentional plans, and transparently monitor progress.
Given that ESG is an iterative process, companies will need to seek feedback and remain accountable to stakeholders, and identify those areas where efficiency and effectiveness are or are not achieved.
For many biopharma companies, formalizing an ESG process can bring enriching benefits to the organization and culture, and, most importantly, can address community challenges and create meaningful change for generations to come.
Adam Lohr, life sciences senior analyst, RSM US LLP