By Hanno Ronte, Partner, Monitor Deloitte and Karen Taylor, Director, Centre for Health Solutions

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The term, Environmental, Social, and Corporate Governance (ESG), first coined in 2005, is used to describe a company’s consciousness for its social and environmental impact. Since then, ESG has become a key strategic differentiator for businesses and an increasingly important priority for investors and consumers. Some industries have been quicker than others to implement sustainable policies, but the pharmaceutical (pharma) sector, has historically lagged. However, pharma’s role in the fight against COVID-19 has helped boost its public image and created a momentum for it to develop a more proactive approach to identifying and delivering ambitious ESG targets. But what exactly is ESG and who is responsible for delivering pharma’s ESG agenda? This week’s blog is a discussion between Karen Taylor, the Director of the Centre for Health Solutions, and Hanno Ronte, a Partner in Monitor Deloitte, exploring these questions and identifying the steps that pharma needs to take to implement the ESG frameworks and principles more effectively.

Karen Taylor (KT) Pharma’s rapid response to the COVID-19 pandemic and its impressive development of vaccines, treatments and tests appears to have transformed public attitudes and created an opportunity to turn around the sector’s ESG image; however, how confident are you that everyone in the industry is aligned sufficiently on the definition of ESG; and how would you define ESG?

Hanno Ronte (HR): I’m not at all confident that there is an alignment. Although ESG is seen as the new corporate sustainability yardstick, it is not a new measurement. But what is new is that ESG accountability, due in part to the pandemic, is now more of a priority for all industries, including pharma. In general, ESG is naturally a broad church because of the number of stakeholders involved, from regulators and government to investors and customers, but also employees, local communities, and others. So, having a clear understanding of ESG in pharma is crucial.

When it comes to the definition of ESG my take is:

  • ‘E’ is for environment, and especially climate change, which has been the biggest focus of pharma’s attention, but differences remain as measures such as greenhouse gas emissions, air quality and water management are generally well understood but the advent of green products and/ or technology and the use of environmentally conscious business practices, are more open to interpretation and need refining
  • ‘S’ or social measures have been a consideration since social activism in the ‘60s and ‘70s (think Civil Rights movement and the Vietnam War) however these measures have now risen way up the political agenda and the impact of COVID in exposing how unequal most societies were or have become. However, the life sciences industry is in the unique position of directly impacting the ‘S’ given their day-to-day focus on delivering life-improving medicines
  • ‘G’ or governance is much less discussed and includes everything from who serves on a company’s board to executive pay levels to the rules and processes that define how a company runs; and while inputs are easy to measure, outcomes are much more challenging.

KT: There appears to be a conundrum across all industries, including the life sciences industry, about who owns ESG (and is responsible for driving improvements) which presents a major challenge for many as the ‘E’ and ‘S’ are often executed and owned by different parts of the business. In your opinion, who is responsible for managing and implementing ESG initiatives in the life science industry and should the ‘E’, ‘S’ and ‘G’ be considered separate entities?

HR: Many companies have appointed a Chief Sustainability Officer (CSO) or Chief ESG (‘C-ESG’) Executive. Indeed, more big pharma companies have hired CSOs in 2020 than in the previous three years combined.[1] However this need to assign responsibility has coincided with plans for considerable transformation in the structures of companies, impacting C-suite skillsets and organisational reporting structures. However, CSOs will be unlikely to succeed if they see ESG as binary issues, as you cannot really improve one aspect without impacting the other. Moreover, CSOs interpret sustainability differently. Some are focused on a NetZero mission or a climate agenda whereas others are identifying and analysing a detailed set of ESG factors. Therefore, the individuals in these roles, no matter what the company focus is, will find it difficult to have a real impact unless the delivery of ESG targets becomes a busines wide responsibility. The CSO can then act as a navigator, conducting the different players to produce a coherent and consistent approach to ESG across the business.

The reality today however is that CSOs are more focused on external reporting and communication mostly aimed at shareholders and other investors.  Moreover, to be effective, the CSO role needs to be empowered and accountable for creating lasting change. Yet, across all aspects of ESG, particularly climate and social sustainability, the rhetoric of leaders often feels disconnected from the reality of those who execute and run the businesses. Pharma therefore needs to ensure that the ambition of leaders is translated into actions throughout the organisation. These actions can then be guided and driven by CSOs who in turn can hold other C-suite executive to account for their performance.

KT: Deloitte’s recently published CxO survey highlighted the culture changes that will be necessary to move the dial from ambition to impact and the current focus on environmental sustainability.[2] Do companies need to think about ESG concurrently and potentially across industry to make impactful changes?

HR: The cross-industry point here is key because no one can govern these changes effectively on their own. Therefore, there is a need for a new set of responsibilities, measurement and reporting standards, and a clearer definition of the role of ESG in business. One issue that needs resolving for each company is whether the distinct separation of ‘E’ and ‘S’ is necessary, helpful, or practical in driving real change in the business and beyond? Especially as it requires coordination with other stakeholders beyond the company.

Businesses need to focus on creating the framework and principles for climate and socially based decision making with precise and executable programmes that lead to action and are embedded into the business. Data produced from these frameworks should be managed to communicate impact, by investing in the right data and measuring systems that can be refined and aligned with other industries over time.

One lever that is set to effect change is the Taskforce on Climate-Related Financial Disclosures (TCFD) initiative which comprises a set of 11 recommendations that address governance, strategy, risk management, and metrics and targets. TCFD reporting, however, is not just a tick-box exercise for annual account reporting as it provides ‘consistent, decision-useful and forward looking’ information on the material financial impacts of climate change. The UK is leading the way in making TCFD-aligned disclosure mandatory for over 1,300 of the largest UK registered companies and financial institutions, and for all UK premium -listed companies to state whether their disclosures are consistent with TCFD recommendations or to explain why not.  As such it can help to future proof businesses; drive strategic change and, in providing a ‘standard’ can boost stakeholder confidence.[3]

KT: So, Hanno, are there any quick wins for how a company can begin to effectively implement ESG frameworks and principles?

HR:  For me aligning the company around ESG priorities and focusing on impactful company disclosures is important.  I would also suggest that there is a need to view things in terms of organisational change and that this gives rise to four broad options or quick wins:

  • create an integrated CSO with influence - much like a regulatory function or internal audit, this role definition should allow the CSO to build frameworks and generate the ability to hold the business to account for decisions and plans
  • embed ESG responsibility in the strategy function - the goals of climate change and social impact are about allocating scarce resources so have to be embedded in the day-to-day direction and budgets for the business. The strategy function does that today, so it is natural for them to adopt this role
  • separate climate and social impact responsibilities - recognising that these are different, even if complimentary roles, with a leader for each. The former is likely to sit more in the supply chain function, and the latter in the strategy function
  • just do it - make it the executives team’s responsibility to embed the thinking into everyday business with a culture change that starts at the top. Climate and social impact will soon become integrated into the business so start that integration from the top, today.

In my experience the goal and ambitions of today, will be the actions of tomorrow. However, choosing the right path will depend on the leadership’s ambition and willingness to drive this culture change in a way that aligned to a company’s specific behaviours.  The most important change that a company can make is to move beyond statements, discussions, and presentations to actual measurable actions. The environment, investors, employees and, of course, patients will benefit from those business that do this effectively; and these businesses are likely to be rewarded by the choices made by investors and employees. The winners and losers of the competitive, post-pandemic pharmaceutical landscape will depend on who takes seriously consumers and investors priorities for sustainability.

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Hanno Ronte - Partner, Monitor Deloitte UK

Hanno is a partner at Monitor Deloitte, our strategy consultancy business. He has more than 20 years of consulting experience primarily in the healthcare and life sciences sector. Hanno leads the Life Sciences and Healthcare team in Monitor Deloitte and is responsible for building the ‘Real World Evidence Capability’ within that. His projects have focused on corporate and business unit strategy, competitive response, marketing strategy and capability building.

Email | LinkedIn

Karen pic

Karen Taylor - Director, UK Centre for Health Solutions

Karen is the Research Director of the Centre for Health Solutions. She supports the Healthcare and Life Sciences practice by driving independent and objective business research and analysis into key industry challenges and associated solutions; generating evidence based insights and points of view on issues from pharmaceuticals and technology innovation to healthcare management and reform.

Email | LinkedIn

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1 https://businesschief.com/sustainability/charting-rise-chief-sustainability-officer

2 https://www2.deloitte.com/global/en/pages/operations/articles/deloitte-cxo-sustainability-report.html

3 https://www.fsb-tcfd.org/

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