Compliance as the Catalyst: ESG in Life Sciences

Like many companies in other sectors, Life Sciences companies recognize that corporate social responsibility (CSR)–evaluated and measured by independent rating organizations and based on their compliance with any applicable ESG-related legal or regulatory requirements–is here to stay. Over the past several decades, CSR has evolved through several iterations, with the current focus commonly referred to as Environmental, Social and Governance (ESG) or “sustainability” programs.

Regardless of what they call it or the industry in which they operate, corporations may be subject to regulatory obligations, market or societal expectations to make a tangible commitment to advance the communities they serve, act responsibly in their use of resources and protect employees, the broader community, and the natural world. This requires such corporations to govern themselves transparently and with integrity–all while delivering value and driving economic growth. And as political systems, regulators, investors, and employees increasingly demand proof of this commitment, executives face mounting pressure to deliver. Business leaders are looking for ways to operationalize and, particularly in Europe, demonstrate their dedication to ESG principles to support access to capital, attract top talent, and secure their company’s ability to operate in a constantly changing, complex, global ecosystem.

This is especially true for life sciences companies–specifically, manufacturers of pharmaceuticals, medical devices, biotechnology, vaccines, and related products. Life sciences companies operate in a complex web of inter-related laws, regulations, industry codes, social/ethics frameworks, and business pressures. The industry has historically faced critical reputational pressure around regulatory compliance, pricing practices, access to medicines, and clinical trial and development issues.

ESG requirements present both a regulatory challenge and an opportunity to demonstrate reputation-enhancing commitments to the public. Given the focus of regulators around the world and the varied expectations of external stakeholders on ESG risk, impact and opportunity management, the questions become: How can life sciences companies effectively implement ESG programs in the face of current market headwinds that constrain their ability to invest in such programs, and who should lead that effort? 

Many life sciences companies have taken steps to address this question, with the typical first reaction of assigning ESG responsibilities to an existing internal function. Due to the legal and regulatory complexity involved, ESG-related tasks often first fall to the Legal department–particularly when there is a legal requirement. Often, these requirements are also not very clear and require a degree of analysis and risk-based interpretation. Because ESG risk, impact, and opportunity management fall within the general remit of ethical business operations, however, the Corporate or Healthcare Compliance Officer (“CCO”) is typically in the mix as well, and often already manages the implementation of key ESG-related risk, impact, and opportunity management programs.

Practical Steps for CCOs

In many ways, it makes sense that CCOs are tasked with operationalizing an ESG program–especially in terms of both a program's implementation and content; their existing networks across the enterprise position them well for successful ESG implementation.

1. CCOs are uniquely qualified to translate legal, regulatory, market and social requirements (such as national, regional, international, and sector-specific Codes of Practice and investor requirements) into an operating model. Using the basic elements of any compliance program, CCOs know how to cycle through issue identification, written standard development, business process and control optimization, training, deployment, testing (i.e., auditing and monitoring), and following up on instances of non-compliance.
2. CCOs are intimately familiar with designing Key Performance Indicators (“KPIs”) and reports for stakeholders–whether for internal committees and Boards of Directors, or in response to regulatory requests and external investigations. These reports should always balance transparency with legal sensitivities–a balance that CCOs routinely achieve as part of their role. This skill set is of critical importance when developing externally facing content that must align with internal legal documents (such as SEC or other regulatory filings), accurately depict business activities, and be relied upon by rating agencies/companies to assess the company’s ESG progress, or tailor disclosure depending on clear stakeholder preferences.
3. There is good news for CCOs, however: in our experience, much of the content and activities covered in ESG programs and subject to regulatory requirements or reporting to rating agencies already falls within the remit of a life sciences CCO.
   • Governance (“G”): Where there is the most overlap between CCO oversight and ESG content is in the governance element. Most governance-related activities require describing and reporting on the organization’s governance and risk management structure. This includes governance committees (such as the Compliance Committee), Board of Directors reporting, and processes for identifying and mitigating risks specific to the company’s activities (e.g., formal risk assessments and risk mitigation plans, compliance hotlines, investigation protocols, and monitoring activities). CCOs also focus on anti-bribery/anti-corruption (“ABAC”) efforts as a primary focus of life sciences compliance programs.

• Social (“S”): Secondly, the social aspects of ESG focus on the key areas in which life sciences companies operate, including access to medicines (e.g., product donations, clinical trials, compassionate use programs), serving communities, labor and employee welfare, and diversity. Many of these areas fall within the purview of CCOs today as part of their risk management programs.
• Environmental (“E”): The environmental component may be the area least familiar to the typical life sciences CCO. That said, most CCOs have built strong connections with their Quality and Environmental, Health and Safety (EHS) colleagues–particularly in manufacturing, where supply chain topics, environmental waste, and footprint issues are managed–and can work with those colleagues to identify and implement effective compliance practices.

When positioned properly, having the CCO manage the ESG program may not be as daunting as it may at first seem–with the emphasis on “manage,” which is not to say, “own.” As with many issue-driven programs, managing ESG involves a significant amount of cross-functional collaboration, cooperation, and project management to pull many pieces of disparate information together to form and inform a cohesive program. If your organization is not in a position to dedicate a resource to ESG program development, management, and reporting, the CCO may be the best-positioned executive to lead and oversee implementation. Even when the company is ready for a dedicated resource, the interdependencies lend themselves to continued close collaboration or continued organizational responsibility.

Getting Started

The most difficult task in initiating any project is defining where to start. Here are a few practical tips for CCOs:

• The first step is to understand the key elements of an ESG program, likely in partnership with the Legal department: What legal and regulatory requirements is your business subject to with respect to ESG? Are you voluntarily adhering to or reporting against any ESG standards as best practice, even if not directly subject to them? What do the rating companies look for when assessing a company’s commitment to ESG and what do they measure? Within the life sciences sector, what core ESG elements align with the work that your company currently does? Which elements have a lesser impact in your sector? What standards do your main shareholders or investors align to?
• Conduct a gap analysis against the standards and expectations identified above, with consideration to your company’s desire to “move the needle.” This may shift over time. You will need to understand the strategic importance of ESG ratings for various aspects of your company’s strategy. Is the main reason for investors? For reputation? For legal and regulatory compliance?
• Determine the uplifts you will pursue and implement a change program internally. This will involve:
  • Pinpointing and leveraging existing resources. Who within your organization is responsible for the different aspects of the program? What have they already been doing that meets ESG risk and impact management requirements? How can you pull all these resources together?
  • Reviewing peer-company, publicly available ESG reports. You can benchmark peer-company program approaches as a lever when presenting your plan to company management. You can also practically get ideas on how to package your information and complete reporting requirements.
• Finally, report against your mandatory or chosen ESG framework(s) and keep track of ongoing compliance. Archive your reports in your internal records for at least seven years.

Taking these initial steps will be important to help you prioritize your resources and launch a program that aligns with your company’s strategy. As your program matures, you will be well situated to either hand-off the program responsibility to a dedicated resource, such as a Sustainability Officer, or continue to strategically deploy limited resources and effort strategically to achieve the ratings and business impact desired.

Hear more about ESG for life sciences organizations at Ann and Jim’s presentation, “ESG Overload — A CCO’s Guide to a Balanced Program Implementation,” at the 25^th Annual Pharmaceutical and Medical Device Ethic and Compliance Congress.

*Jim Massey is an ESG advisor to the Life Sciences Consulting Group of Paul Hastings.