Environmental, Social and Governance (ESG) is the new corporate sustainability yardstick. Although not a brand-new measurement, ESG accountability—thanks in part to the pandemic—is pushing the measure to the front page across industries, including pharma.
Traditionally referred to as corporate social responsibility or sustainability, the newer ESG moniker has become a rallying point for millennial fund investors and younger employees who want to work at companies that do good in the world.
Why is ESG gaining so much momentum? Follow the money. Billions of assets sit under management in ESG funds with booming growth underway.
In the U.S. last year, more than $51 billion in new investor money poured into ESG funds—breaking the record for a fifth consecutive year, according to Morningstar research, and more than doubling the $21 billion invested in 2019. Last year's ESG total accounted for one-fourth of the money pouring into all U.S. stock and bond mutual funds last year—a giant increase from a 1% share in 2014.
Now, 2021 is on track to smash the record again with $21 billion already invested in the first quarter, according to Morningstar’s latest tally.
While millennial values-driven approaches to money and career may have helped spur growth in ESG investing and measurements, now every generation wants in, according to a recent CNBC report.
“Nine times out of 10, if you ask people, ‘Do you want to invest in a way that leaves a positive mark,’ they will say yes,’” Harlin Singh, head of sustainable investments at Citi Private Bank, said.
In general, the “E” for environment—and especially climate change—is the biggest focus for investors, but the pharma industry has some particular differences when it comes to ESG evaluations.
Much like the oil and gas industry, where environmental concerns overwhelm the rest, pharma has an omnipresent black-cloud issue—drug pricing—that tends to sway ESG evaluations.
Alastair Pickering, co-founder and chief marketing officer at Alva market intelligence group, which collected and analyzed data for this Fierce Pharma report, agreed that drug pricing can dominate, but cautioned against the industry dismissing other issues under the ESG umbrella.
“ESG is a broad church because there are a number of stakeholders involved—regulators and government, yes, but also employees, local communities and others,” he said. “While pricing is the thing that continues to undermine perception of pharma’s ESG stance, it doesn’t mean that’s the only thing it should focus on.”
RBC Capital analysts agreed in a recent investor’s note and noted the potential for change.
“Pharma has historically been penalized for exposure to litigation (e.g. opioids and talc), corporate behavior (e.g. drug pricing), product safety and recalls, or issues with access to affordable healthcare,” they wrote. “However, our analysis indicates that momentum in pharma ESG investing is improving as these ESG risks evolve.”
But what exactly is ESG?
The environmental measures, including greenhouse gas emissions, air quality and water management are generally well understood. So-called green or eco-investing gained traction in the 1990s as some investors looked beyond pure-play companies focused on green products or technology toward those in other industries that used environmentally conscious business practices.
The "S" or social measurement has long been a consideration, too. Social activism in the ‘60s and ‘70s around the Civil Rights movement and the Vietnam War helped push social-minded investing forward. One early advocate of sustainable investing, Milton Moskowitz, created a list in 1972 of “socially responsible stocks” to track performance against broad market indices, including the first sustainable funds.
Social investing has surged again during the past 12 months, Pickering said, with renewed Black Lives Matter advocacy and the COVID-19 pandemic’s disproportionate effects on racial and ethnic minority groups.
Pharma companies were among those last June calling out racial inequalities, police violence and systemic racism. Ken Frazier, then-Merck CEO and the only African American pharma chief executive, said, "Leaders in the business community can be a unifying force. They can be a source of opportunity."
The “G” in ESG, or governance, is less discussed and even overlooked. It 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. Pickering sees a change coming in governance’s importance.
“The trend we see is a lot of the environmental and social aspects ultimately migrate to the boardroom and are codified and reported on in the same way that diversity in the boardroom is, for example. These things are going to be mandatory to report on, and very soon,” he said.
As ESG interest and investing rise, many companies are turning to third-party evaluators for insight. Among the leading standards and frameworks, the Sustainability Accounting Standards Board (SASB) has become one of the preferred for investors with standardized data and categories tailored to financial performance.
Alva’s ESG Intelligence uses SASB’s 26 sustainability business categories to classify millions of pieces of company-related content. Alva uses machine learning and natural language processing to analyze and score the content based on sentiment and materiality measures.
For this ESG report, Alva analyzed and scored the 26 different standard ESG topics for 20 pharma companies from January 1 through April 30. Those category evaluations are then combined to create an overall score for each company.