Sustainability, corporate responsibility, and environmental, social and governance (ESG) practices have permeated corporate sectors as governments, stakeholders, and corporations have realized the importance of such practices in minimizing an organization’s impacts on society and the planet and maximizing business resilience in the face of ever-changing risks. The Life Sciences sector is no different, and its diversity of business operations encompass a variety of sustainability and ESG practices: R&D and innovation, technology and cyber-systems, manufacturing, transportation and distribution, and end-consumer advertising and interactions. These processes carry inherent current and future business risks.
How can a company’s sustainability and ESG programs and practices help enhance resilience against such risks? Certainly there are many business risk factors — geopolitical (wars, conflicts, macroeconomics), regulatory and compliance, end-consumer sentiment, competition, natural and man-made disasters, and weather and climate impacts. Of course, not all risks can be entirely mitigated through an organization’s sustainability programs. However, when an organization’s goals and initiatives align with its stakeholder commitments, business resilience can be enhanced.
A 2023 survey of Life Sciences companies[i] identified their most significant perceived business risks. The survey output below is used as a convenient outline to describe the associated sustainability or ESG feature(s) that may help mitigate the risk (in order of most to least significant):
Supply Chain or Distribution Failure
It is reported by the Massachusetts Institute of Technology that a company’s commitment to supply chain sustainability resulted in a greater resilience to the significant business disruptions presented by the COVID-19 pandemic and the Ukraine War. Further, while supply chain sustainability commitments may falter in response to less favorable economic conditions, pressures from stakeholders to maintain their programs remain.[ii]
Cyber Attack or Data Breach
Cyber attack likelihood can be exacerbated by new trends and technologies that increase internet connectivity — such as the Internet of Things, Artificial Intelligence and wearable devices, remote working, and ever-expanding global supply chains.[iii] Incorporating data protection and privacy measures into an organization’s sustainability planning add to a company’s resilience to potentially disastrous cyber attacks.
Business Interruption
Business interruptions can result from natural or man-made factors — sea level rise and increased flooding, raw material shortages, and social considerations. The COVID-19 pandemic revealed the gaps in organizational contingency planning, showing that more attention of supply chain principles was needed,[iv] and the Ukraine War showed the vulnerability of natural gas supplies in Europe. These events highlight the “inextricable link” between ESG principles and business and financial resilience and success.[v]
Regulatory or Legislative Changes
Life Sciences companies are highly regulated, and typically maintain organized environmental, health and safety (EHS) and sustainability and ESG reporting programs. Robust tracking and compliance programs can lead to greater resilience in the face of expected or unexpected regulatory obligations. Many Life Sciences companies are considering beginning or expanding ESG reporting due at least in part to increasing stakeholder pressures, ESG ratings methodologies, and potential new climate, financial, and ESG disclosure requirements in different parts of the world.[vi]
Failure to Attract or Retain Top Talent
Highly talented and skilled individuals are in high demand from Life Sciences employers. Candidates are ever more prioritizing their career path and work environment based upon their employers’ sustainability, diversity, equity and inclusion (DEI), and ESG programs, ranking scores or as benchmarked against competitors. More and more, companies are recognizing the need to show their commitment to sustainability principles and their stakeholders to more effectively compete for talent.[vii]
Damage to Brand or Reputation
Financial, climate change, and ESG disclosures can make news and affect an organization’s reputation. Corporate communications departments should monitor if “messages related to ESG are resonating” with the public, keep tabs on their competitors’ ESG communications through benchmarking, and communicate proactively with members of the news media.[viii]
Product Liability or Recall
Globally, countries and jurisdictions regulate products or their composition due to dangerous or toxic materials in a product or risks around product usage. Concerns may include design and manufacture, advertising and labelling, end of life and repairability, and waste management.[ix] Many companies are on the path to a more circular business model to more effectively mitigate these risks.
Failure to Innovate or Meet Customer Needs
A survey[x] of 500 risk management executives showed pandemic concerns ranked highest, followed by ESG pressures and cyber-network disruption or attacks. Next was failure to innovate or meet customer needs. It may seem obvious that customer needs should drive innovation, but a Wharton School report notes that companies may have more to do in this regard, and innovation may not necessarily benefit from ESG. This is because “…there is no clear framework for organizations to embed ESG priorities within their R&D and innovation efforts” and that challenges exist that “…prevent companies from focusing their innovation efforts and resources on these ESG goals.”[xi]
Cash Flow or Liquidity Risk
More robust ESG programs are known to correlate with better business performance, but the relationship is not necessarily causative. [xii] A separate study comprising a survey of 1,500 S&P firms conducted to assess ESG program impact on corporate cash holdings showed that a high level of ESG disclosure leads to better cash holding policies due to “strong internal and external monitoring mechanisms.”[xiii]
Capital Availability
When companies assess their business risks and make improvements to their ESG and sustainability initiatives, they may be able to lower their costs and enable more resilient business models. These efforts, together with a well-conceived communication plan “…can help make a company more attractive to ESG-focused investors thus potentially both improving access to capital and reducing the cost of that capital.”[xiv]
In conclusion, Life Sciences companies can increase business risk resilience through robust sustainability, corporate responsibility and ESG initiatives. These initiatives can improve the organization’s relationship with its stakeholders, minimize impacts to the community and the environment, and help the organization adapt to often unpredictable external circumstances.
References:
[i] Aon. (2023) Top Risks Facing Life Sciences Organizations. Available at: https://www.aon.com/en/insights/reports/global-risk-management-survey/top-risks-facing-life-sciences-organizations#:~:text=Life%20Sciences%20industry%20respondents%20to,wave%20of%20innovation%20and%20growth (Accessed: 10 December 2023).
[ii] Massachusetts Institute of Technology, Center for Transportation and Logistics. (2023) State of Supply Chain 2023 Report. Available at: https://sscs.mit.edu/wp-content/uploads/2023/10/MIT-CTL-State-of-Supply-Chain-Sustainability-2023.pdf (Accessed 10 December 2023).
[iii] Aon. (2023) Top Risks Facing Life Sciences Organizations. Available at: https://www.aon.com/en/insights/reports/global-risk-management-survey/top-risks-facing-life-sciences-organizations#:~:text=Life%20Sciences%20industry%20respondents%20to,wave%20of%20innovation%20and%20growth
[iv] Sidley. (2020). Insights for Leaders. The Link Between ESG and Business Continuity – What Boards Need to Know. Available at https://insights.sidley.com/leaders/esg-business-continuity (Accessed 10 December 2023).
[v] Ibid.
[vi] Cooley (2022). Life Sciences ESG Reporting Practices. Available at: https://www.cooley.com/news/insight/2022/2022-11-14-life-sciences-esg-reporting-practices (Accessed 10 December 2023).
[vii] Lohr, A. (2022). PharmExec.com. Biopharma and ESG: Key Strategies for Companies, Meaningful Changes to Communities. Available at: key-strategies-for-companies-meaningful-changes-to-communities (Accessed 10 December 2023).
[viii] Dow Jones. (Undated). ESG: The New Dimension of Reputation Management. Available at: https://www.dowjones.com/professional/resources/blog/the-new-dimension-of-reputation-management (Accessed 10 December 2023).
[ix] Dobson, S.J., Silver, S. Kennedys. (2022). The ‘responsible’ Responsible Person – The Complexities of ESG Product Compliance Obligations for the Life Sciences Industry. Available At: https://kennedyslaw.com/en/thought-leadership/article/the-responsible-responsible-person-the-complexities-of-esg-product-compliance-obligations-for-the-life-sciences-industry/ (Accessed 10 December 2023).
[x] Chubb. (2023). 2022 Study of Future Risks & Readiness. Thinking About Tomorrow. Available At: https://www.chubb.com/content/dam/chubb-sites/chubb-com/us-en/businesses/future-of-risk/CHUBB_FutureOfRisk_Digital_ADA_040722.pdf (Accessed 10 December 2023).
[xi] Snyder, S., Macwan, S. Knowledge at Wharton. (2023). The Missing Link Between ESG and Corporate Innovation. Available At: https://knowledge.wharton.upenn.edu/article/the-missing-link-between-esg-and-corporate-innovation/ (Accessed 10 December 2023).
[xii] Perez, L., Hunt, D.V., Samandar, H., Nuttal, R., Binek, K. McKinsey Sustainability. (2022). Does ESG Really Matter—and Why. Available At: https://www.mckinsey.com/capabilities/sustainability/our-insights/does-esg-really-matter-and-why (Accessed 10 December 2023).
[xiii] Atif, M., Liu, B., Nadarajah, S. (2022). The Effect of Corporate Environmental, Social and Governance Disclosure on Cash Holdings: Life-cycle perspective. Wiley Online Library Research Article. Available At: https://onlinelibrary.wiley.com/doi/full/10.1002/bse.3016 (Accessed 10 December 2023).
[xiv] Citigroup. Starting Early on ESG and Sustainability Strategies Can Support Growth Long-term for Privately Held Companies (2023). Available At: https://www.citigroup.com/global/insights/commercial-bank/starting-early-on-esg-and-sustainability-strategies (Accessed 10 December 2023).