ESG in Biotech: Paving the Way for a Sustainable Future

The biotech industry, predominately pre-commercial publicly listed companies, is some way behind the curve, with a recent study conducted by law firm Fenwick reporting a huge 70% who have not referenced ESG in their recent public disclosures. Factors such as the maturity of a company are key considerations, as the longer a company is public, the more likely it is to report on such practices. With 2021 seeing a record-breaking number of initial public offerings (IPOs) by biotechs, we are likely to see a flurry of ESG disclosures over the course of 2022 and beyond as the U.S Securities and Exchange Commission (SEC) tightens the screws on reporting requirements. This is further backed up by the Fenwick survey which reported that out of 100 biotech executives approached from biotechs and investors with a market cap of $100 million to more than $4 billion, ‘92% of respondents think ESG disclosures will become more important in 2022’. Specific to investors, it was reported that they ‘expect ESG’s prominence to grow’ and ‘pointed to increasing pressure from clients to include ESG-focused companies in portfolios’.

Before we discuss why ESG factors are likely to be the cornerstone of future investment decisions, it would be sensible to look at the metrics that are likely to be reported. It is widely reported that investors and executives think there is a clear lack of standardised reporting metrics, so if mandated by the SEC, efforts must be made to ensure the reporting metrics are transparent. In turn, this will give investors and executives the ability to measure year-on-year progress and allow for cross-company comparisons, likely facilitating further ESG reporting. Josh Blackman, Partner in Boyden’s UK & Ireland Healthcare & Life Sciences practice strongly believes that the industry clearly sees the importance of the ESG agenda but high levels of ambiguity around what is required to be reported on are stifling progress.

As we head towards the end of Q2, companies should be looking at how they can start to prepare as ESG’s importance shows no signs of waning. Currently, there appears to be a ‘chicken-and-egg’ situation where biotechs are looking at each other to compare what ESG issues they should be reporting. Ultimately, what is important to their business and their key shareholders and investors should be high on their priority list. An important consideration is who within the business should have overall oversight and ultimately hold the board accountable for its ESG activities and disclosure. It could either come from existing internal colleagues as part of a multidisciplinary committee or an individually dedicated resource. The latter option, and one that some companies are adopting, is the hiring of a CSO. No, not Chief Scientific Officer but Chief Sustainability Officer. This newly created position potentially could aid in evaluating the business’s current impact on the environment; the environment’s impact on the business; and determine how to increase the business’ sustainable practices and mitigate its risks. This may well provide the board and investors with the required assurance that this individual is likely to remain impartial on business decisions whilst ensuring concerted efforts are made to drive the ESG agenda forward.

As biotechs look ahead at commercialisation, and start selling assets, the type of metrics being reported is likely to shift. Probi, a publicly listed commercial biotech, is an example of business who are on a journey of sustainability with its VP of HR & Sustainability, Basudha Bhattarai Johansson, believing all companies, regardless of size, can contribute to making the world a better place. Johansson continues when Probi is helping people around the world to improve their health, we’re making fundamental changes in society and showing that life and health are important.

Larger, more established pharmaceuticals traditionally have scored poorly on ESG ratings as past scandals and pricing controversies have weighed down their performance.  As litigation payouts and drug prices seem to have fallen, the dial is likely to swing. Coupled with a recent PwC report showing 56% of consumers having an increased positive perception of the industry linked to their role in vaccine and treatment developments, now seems the perfect time to take steps to prolong this positive perception of the industry. Record-breaking profits in 2021, an example being Pfizer’s 92% increase from $42 billion to $80 billion, are unlikely to aid positive public perception as many will see the industry profiting from the pandemic.  If businesses can be seen to reinvest profits into ESG areas, this is likely to go a long way.