COMMENT | What does ESG mean for life sciences?
Business leaders know that environmental, social and governance issues are increasingly important – to their customers, their people and their investors. This is no longer a “nice to have”, but a key part of doing business in the modern world, writes James Fry.
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At Mills & Reeve, we are bringing an ever-increasing focus to our own business practices, and, more importantly, to how we can support our clients in achieving their own ESG goals. Here we consider what this means for the life sciences sector and what steps we are seeing organisations take to make a real difference.
A responsible approach to doing business has long been a priority for the life sciences sector. In this highly regulated industry, the risk of harm is intrinsically high. This means that compliance with not just the letter of the law, but also the underlying principles, is at the forefront of minds from the top to the bottom of a well-run organisation. Dealing with products and services that affect the health of many individuals, and with ethically complex issues like genetic modification, means that organisations regularly encounter the need to make difficult choices, and to be accountable for the decisions they make.
What are the E, S and G?
ESG brings in a wide range of topics and concerns, and while there are some universal touchpoints, the main issues will vary from sector to sector. The ESG metric helps organisations to think through all of the issues – including those that they might not previously have identified for attention:
- Environmental is all about reducing our impact on the planet and addressing the climate crisis.
- Social looks at the impact that an organisation has on the people that work within it, and within its business partners, and the communities that it serves.
- Governance focuses on ensuring that an organisation has a strong decision-making structure that is fit for purpose and ensures that the likely end-points are taken into account in any decision taken.
Investors are increasingly focusing on the ESG perspective when making decisions as to where to allocate capital. Likewise retail investment funds are under pressure from the market to provide ethical options. Public market regulators set standards to be met by larger companies. Falling short in these areas is increasingly seen as a risk factor for investors, exposing a business to the possibility of problems like regulatory sanctions and product recalls. Such is the pressure to move towards sustainability, that some investors find it difficult to identify sufficient opportunities that match their criteria.
Analysis by index-provider MSCI relies on a breakdown, weighting factors by sector. The MSCI ESG Industry Materiality Map identifies the following areas as particularly important for its assessment of life sciences businesses:
- E: carbon emissions, and toxic emissions and waste
- S: human capital development, product safety and quality, and access to health care
- G: ownership and control, board, pay, accounting, business ethics, and tax transparency
New ways to do business
Major pharmaceutical companies have been active for many years in building responsible supply chains. As part of a global industry, they have faced the need to address problems around ethical and responsible business earlier than most. Collaborative projects like the Pharmaceutical Supply Chain Initiative help businesses to collaborate in promoting responsible supply chain management and better business conditions across the industry.
For smaller and younger organisations developing and embedding best practice can be a challenge.
There are relatively straightforward changes that can be introduced into day-to-day practices. Tightening up auditing and reporting provisions in contracts with commercial partners can, where appropriate, drive better behaviours in your supply chain. It can also help to demonstrate that you are taking action in your regular business activities.
Some activities can be updated more extensively, but without necessarily having a detrimental effect on workflow. During the past 18 months, for example, we have seen a much greater use of remote working in clinical trials, with patients able to attend appointments digitally rather than visiting a hospital. Introducing this kind of practice on a long-term basis would see a major reduction in travel requirements for trial subjects. Likewise, the use of digital technologies in everyday clinical practice during the COVID-19 pandemic has demonstrated that remote appointments and use of health technology can enable greater efficiency and reduced need for travel.
Premises and property
While life sciences organisations may not be among the top contributors to the environmental impact of construction, they often have complex and sophisticated premises requirements. Purpose-built R&D and manufacturing facilities will often have intensive energy needs. As an organisation grows and evolves, it is likely to need a different size and combination of facilities, moving from research towards manufacturing scale-up, for example. This will often mean a change of location.
Organisations can make a positive impact in their selection of new premises. While there are many factors for an organisation to consider when finding a location for expansion or relocation, adding the environmental impact of a building to the list can be a straightforward way to make a substantial, long-term change. Science park specialists We are Pioneer Group, for example, have specific environmental objectives for their sites – such as the Nottingham BioCity Garden. Read more about the environmental agenda for real estate here, and access our report on Building towards net zero.
A diverse talent pool
We find that businesses that take a lead on ESG are more likely to be seen by prospective job candidates as good places to work and so these efforts support both recruitment and retention.
Hiring and developing people from across the community can be a challenge for life sciences. The level of education and specialist skills required may limit the pool of talent available. But considered and well-developed policies for staff can make it possible for organisations to attract and retain diverse individuals who might not otherwise have been able to fulfil their potential. Beyond that, many business leaders are looking far into the future, with mentoring programmes enabling those still in education to build towards a career in life sciences.
Biotechnology as a driver of sustainability
Life science innovation is an important driver of change. Take one example. Agriculture and food production are widely recognised as a major contributor to carbon emissions and environmental degradation, with agriculture and land use change thought to be responsible of 23% of manmade greenhouse gas emissions.
Pressures to increase production while reducing environmental impact mean that progress is slow. OECD data on the period 2005-07 to 2015-17 showed an increase of 3% in greenhouse gas emissions to 1.47 Gt of CO2eq. About half of this total was in the form of methane, mainly from livestock sources and rice production, with a similar amount in the form of nitrous oxides originating mainly from the application of organic and inorganic fertilisers.
Alternative approaches to agriculture – new crop cultivars developed through breeding or biotechnology, novel microbial animal feeds derived from waste, and methane reduction strategies are identified by the IPCC as potential contributors to both mitigation and adaptation. Likewise, replacement foods such as laboratory-produced meat are gaining in recognition and commercial viability.
So we can see that ESG is hugely important to the life sciences sector. Embedding ESG within your business can make the business both financially and environmentally sustainable in the longer term, making the business more attractive to funders, employees and customers alike. And the industry also has a huge part to play in helping solve some of the biggest problems faced by the planet.
These are just some of the themes that we are seeing as the sector embraces the ESG agenda. We will be exploring these, and others, through a process of engagement with our clients, and will share these perspectives in the months ahead. We would welcome your contributions.
There are immense challenges before us but now, as never before, business is reaching out to meet them, and to find solutions.
At Mills & Reeve, we have recently appointed Neil Pearson as head of ESG and social value. Neil, previously a partner in our corporate tax team specialising in impact and social investment, will be heading up our own ESG initiatives and strategies, to put ESG and social value at the centre of how we run our own business. Neil explains:
“ESG is no longer a ‘nice to have’. All organisations, large or small, and whether public or private sector, need to look at how they could embed ESG into every aspect of their operations. However, whilst this is a real challenge for all of us, the benefits of getting this right are huge, both for us as organisations and businesses, and for society as a whole.”
James Fry is partner at Mills & Reeve