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Interviews with our senior practice managers about issues of important to life science innovators
Paul Sagan, Vice President of Investor Relations and Corporate Communications, discusses the growing investment case for ESG reporting within the biotechnology field, the unique challenges of developing an ESG approach in the life sciences, and the important considerations posed by potential new SEC recommendations and international ESG standards.
As investments into sustainable companies and funds have surged to new highs, how can biotech and life science companies best position themselves with this burgeoning group of investors. Are there investment/business risks in not pursuing an ESG reporting approach?
Well certainly the numbers don’t lie, and ESG funds are now an enormous factor in the marketplace.
Even during the worst of the pandemic when other traditional investments have lagged – ESG investments have grown and now account for more than 30% of total US assets under management.
Last year, investors poured a record amount of money into funds that aim to help the environment and promote social good – more than double the previous year. And according to Morningstar, that’s the fifth consecutive record yearly amount.
This growth has focused traditional asset managers on the sector. According to Moody’s, “investors and asset managers now have a keener focus on ESG investment themes, ESG data and the incorporation of ESG considerations in investment analysis and product construction.” According to the Forum for Sustainable and Responsible Investment, as of 2020, there are more than 836 registered investment companies with ESG related assets
With the Biden Administration’s focus on the environment, growth in ESG investing is likely to continue. Biotech and life science companies, particularly those larger small-cap and mid-cap firms, can no longer ignore the huge pool of funds that these investors represent – as attention to ESG issues is becoming critical to long-term competitive success.
Furthermore, institutional investors are making it clear that they expect the companies they invest in to take a proactive approach to ESG policies and messaging. And this holds serious implications for management teams and their Boards.
In his 2018 Annual Letter to CEOs, Blackrock’s CEO Larry Fink wrote “a company’s ability to manage environmental, social, and governance matters demonstrate the leadership and good governance that is so essential to sustainable growth, which is why we are increasingly integrating these issues into our investment process.”
In his 2021 Letter to CEOs, Fink was even more adamant in his views, “We believe that when a company is not effectively addressing a material issue, its directors should be held accountable. Last year BlackRock voted against or withheld votes from 4,800 directors at 2,700 different companies. Where we feel companies and boards are not producing effective sustainability disclosures or implementing frameworks for managing these issues, we will hold board members accountable.”
What are some of the unique considerations that biopharma and life science firms must consider in mapping out their ESG strategies?
Certainly few industries have received more scrutiny over the past year than biopharma. And biopharma, by virtue of its nature – that of improving human health – has a very strong intrinsic ESG focus and appeal.
However, it has it unique characteristics to address from an ESG standpoint. Probably the most significant are the challenges faced by the fact that research & development is the main source of value creation for the industry – where it may take 10-15 years of effort to progress from a scientific concept to an FDA-approved product. This places particular emphasis on human capital management issues (attracting and retaining talent, workplace diversity and inclusion, etc.)
An important guidance document developed by the Biopharma Sustainability Roundtable – the result of some 2-years of interviews with industry executives and investors on ESG – gives a high-level roadmap that identifies ESG topics of unique priority for the industry.
These include – access to healthcare and medicine pricing, business ethics, integrity, and compliance, clinical trial practices, innovation in therapeutics, diagnostics, and business models, and pharmaceuticals in the environment and anti-microbial resistance, product quality and patient safety, risk and crisis management, and supply chain management, among others.
This points out the fact that the materiality of ESG issues can vary dramatically by industry sector. But it also helps set the stage for thinking about integrated high-priority ESG topics with your overall business strategy.
The U.S. Securities and Exchange Commission has confirmed that it is looking at a broad range of ESG-related disclosure issues, and the international Sustainability Accounting Standards Board is readying a unifying set of global standards for ESG reporting. What impact will these two moves have for life science companies?
For a number of years now, there has been a lot of frustration by public companies focused on the desire for clarity around ESG disclosure.
There are currently more than a dozen non-profit and for-profit ESG data providers who have emerged in a complex, booming market – often to the confusion of companies trying to navigate the maze of ESG issues and disclosures.
As a result, pressure has built on the US Securities and Exchange Commission (SEC) to adopt regulations to help standardize the way U.S. companies disclose relevant ESG information.
On Wednesday, July 7th, the SEC’s Asset Management Advisory Committee approved a recommendation, after an extensive public commentary period, directing that, “the SEC take steps to foster meaningful, consistent, and comparable disclosure of material environmental, social, and governance (ESG) matters by issuers.” Further, “the SEC should encourage issuers to adopt a framework for disclosing material ESG matters and to provide an explanation if no disclosure framework is adopted.”
While this will no doubt spur a lively debate on the topic of “materiality” in the Congress and within industry and investor groups, SEC Chair Gensler has indicated a willingness to pursue to topic. The full SEC could potentially propose new rules in on the issue by October of this year.
And in important news on the international reporting front, last month two of the most prominent ESG standards organizations, the Sustainability Accounting Standards Board (SASB) and the International Integrated Reporting Council (IIRC) merged together to form a new organization, the Value Reporting Foundation, with the goal of bringing consistency and standardization for global ESG reporting.
This should in time provide for a more unified set of standards and approaches, as SASB has been gaining traction in the U.S., while IIRC is predominantly used in Europe for integrated ESG reporting.
So in looking at the overall growth ESG investing, combined with these important moves toward potential standardization and clarity of approaches – and recognizing that major institutions will be looking closely at companies who are not focused on reporting their sustainability approaches, it seems like 2021 could be a watershed year for companies in the biotech and life science field to begin to embrace these principals and move forward with their ESG initiatives.