ESG Pulse of Pharmaceutical Companies in Highly Regulated Markets

Multinational pharmaceutical companies are facing intense environmental, social and governance (ESG) related pressures in the EU and the United States—with each tug pulling in the opposite direction.

The EU, which has been leading ESG regulation for corporate sustainability-related disclosures, including the Corporate Sustainability Reporting Directive (CSRD), now requires even non-EU companies doing business in the bloc to disclose everything from greenhouse-gas emissions to gender pay differences.

Conversely, in the United States, run-up to the November 2024 elections has stirred an already complex sentiment on ESG, becoming subject to political debate at state and federal levels. According to AlphaSense, in the quarters ending April and June, the mentions of Diversity, Equity and Inclusion (DE&I), sustainability and ESG decreased in earnings calls by 31% after a fifth consecutive drop, labelled as “green hushing.”

While political tides seem be impacting companies publicly, reality in corporate board rooms is much different. A recent EY report, surveying over 500 top executives at companies over $1.5 billion in revenue, indicates that 87% respondents believe ESG initiatives are “very to extremely important” to the businesses’ long-term value. This demonstrates that ESG is very much a priority for 2023 and beyond, tracks with APCO Insights’ research earlier this year that indicated there is broader support for ESG initiatives but not the term itself.

So, how are pharmaceutical companies performing on ESG priorities without “green hushing?”

Environmental: The “E” in ESG

A recent study has shown that pharmaceutical companies could cut their carbon footprint by nearly half if they leverage renewable energy and optimize processes. Across all industries, pharmaceutical companies are among the top carbon emitters, but as evidenced by JUST Capital’s 2023 list of leaders for environmental performers, pharmaceutical sustainability leaders are racing to change that in three ways to meet their ambitious environmental and climate action goals.

First, companies are internally optimizing processes with the advent of digital artificial intelligence (AI) tools and by leveraging strategic partnerships to pool knowledge and resources. Second, pharmaceutical companies are increasingly focusing on cutting carbon emissions throughout the value chain from where the raw material is sourced to disposal by patients. Experts agree that manufacturers need to go beyond their own carbon footprint and focus on supply chain (scope 3) by collaborating with ESG conscious suppliers, distributors or manufacturers that share the same values.  Third, pharmaceutical C-suite leading sustainability efforts are authentically connecting their environmental ambitions to their business values and brand. This demonstrates their reason for embarking on the ESG journey and avoids the perception of “greenwashing”.

Social: The “S” in ESG

The social element of ESG is becoming increasingly critical as consumers are more conscious of a brand’s ethics and reputation than before. Even before corporations were embedding ethical standards into their businesses, pharmaceutical companies led with societal issues such as access to medicines and increasing health equity.

Pharmaceutical industry progress on access to medicine and health equity reporting indicates that ESG considerations run deep across four aspects, including proactive assessment processes and priorities in governance, selection of disease with high unmet need in low- and middle-income countries, end to end optimization of access to medicine across all steps of product launch (including indicators for pricing and donations), and healthcare system strengthening and capacity building through local level community engagement and trainings. Deloitte reported that five pharmaceutical companies are leading in this effort and setting a trend for the future by defining new social impact categories and incorporating new ways of working.   This study observed that these leading companies are increasing focus on prioritized diseases, diversity in clinical trials, ATM Index, and access plan framework. It is also noted that reporting on “patent/ IP sharing” and licensing (to generics) will be a future focus of regulation despite hesitation from pharmaceutical companies, attributed to how it could shift the business model.

Governance: The “G” in ESG

Regulations are more stringent for pharmaceutical companies compared to consumer markets, but embedding governance is an important driver of how a pharmaceutical company meets its environmental and social goals. There is no one-size-fits all approach to governance but pharmaceutical companies that are leading ESG efforts are making changes within their organizational structures by incorporating a chief sustainability officer (reporting directly to the CEO—indicating top level prioritization of sustainability goals). Given the scope of the new climate disclosure requirements and the breadth of corporate interest, public companies are considering an internal task force that focuses on ESG requirements and prepare for enhanced disclosures.

Driving Progress on ESG

It is crucial for pharmaceutical companies to communicate actions towards sustainability in a way that demonstrates business cases and shows how a given ESG issue materially impacts business performance. To drive progress, global data recommends “ESG action feedback loop” where pharmaceutical companies take positive action on ESG goals and earn stakeholder approval or third-party validation to further drive authenticity to that goal and incentivize future action.

APCO alumnus Mariam Malik authored this piece.