The ESG Journey: Establishing Processes and Driving Results

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Historically, the pharmaceutical industry has not been a leader in environmental, social, and governance (ESG) matters. Despite meaningful accomplishments concerning global greenhouse gas (GHG) emissions, our progress on climate action has been slow (1). Given the recent focus on sustainability, environmental regulations, and social justice, more pharmaceutical companies are expected to step up and integrate ESG into their short- and long-term strategies. Of course, the related challenges make for a continuous, ever-progressing journey in which milestones and successes stand on the shoulders of previous accomplishments. To achieve meaningful progress and tangible results, ESG must be woven into the fabric of a business.

Companies in the early stages of developing sustainability programs first must determine where to begin — or, at least, begin in earnest. The sheer breadth of ESG can seem daunting, but by taking small steps and establishing appropriate frameworks, companies can achieve positive, substantive changes. And over time, such gains can lead to a self-propelling snowball that gathers momentum as it rolls along. Starting is hard, but the journey gets easier as you progress.

That said, the overall checklist is indeed lengthy. To be true stewards of positive change, pharmaceutical companies must monitor their direct and indirect impacts on the environment and surrounding communities, mitigate hazardous risks, and identify opportunities for continuous improvement. Setting goals and tying them to high-impact action plans will help to drive success in those areas.

The journey starts with a clear-eyed assessment of where a company stands regarding various ESG touchpoints. That requires identifying main impacts related to different organizational activities from both environmental and social perspectives. The following are some tools to make this complex journey a smoother ride.

ESG from Both Sides

Conducting Double-Materiality Assessments: A double-materiality assessment is a two-phased approach used to gauge what internal and external stakeholders identify as material issues relevant to a company. Going far beyond focusing on mere financials, the assessment considers ESG factors that can affect both an organization and its stakeholders.

A comprehensive double-materiality assessment involves engaging employees, leaders, and investors. Ideally, those players are interviewed in one-on-one and group settings to collect their input on the topics most important to them. The goal is to identify ESG areas that should be prioritized. Based on expected outcomes for stakeholders, strategic business values, and the Sustainable Accounting Standards Board (SASB), a company then can identify key focus areas and initial quantitative indicators.

With that information in hand, the double-materiality assessment can proceed to a second phase: interviewing external stakeholders. Depending on a pharmaceutical company’s overall size and capabilities, this second phase can include asking hundreds or thousands of customers, suppliers, investors, and local community partners to rank sustainability issues in order of importance. Notably, if a pharmaceutical company places emphasis on positive changes in the local communities it serves, then it will be critical to include the voices of community members and partner organizations to help shape an ESG program.

That two-phased approach provides pharmaceutical companies a comprehensive understanding of stakeholder priorities and concerns that in turn can inform long-term business strategies. Such insights amount to fundamental building blocks for a data-driven determination of which metrics to track, what information to disclose, and where to focus meaningful performance improvements.

Figure 1 shows the results of a real-life double-materiality assessment conducted by my company, PCI Pharma Services. Carbon footprint and energy efficiency were the topics of greatest interest to stakeholders and external auditors. The assessment also determined that the majority of established ESG impact categories already aligned with stakeholders’ priorities. So the research served to confirm what company ESG leaders had surmised in terms of which factors to emphasize.

Figure 1: Double-materiality assessment results for PCI Pharma Services; items represented by a light gray circle are not aligned with any existing sustainability pillar.

But of course, that exercise was about learning more than what was already strongly suspected. As Figure 1 shows, data security, product quality and safety, and health and safety had the highest impact-materiality scores. Those understandably reflect stakeholders’ primary focus on the core activities of a pharmaceutical company producing mission-critical medicines and delivery systems. Although health and safety already represented one of nine defined ESG impact categories, data security and product quality and safety had not been formally captured in our ESG impact categories and metrics. Given these takeaways, plans could be made to integrate the measurement of two identified topics into a formal ESG program, so that progress can be tracked and communicated regularly.

Facts and Fast Tracks

Accelerating Impact with Science-Based Targets: Pharmaceutical companies should align environmental targets and action plans with the latest recommendations set forth by the Science Based Targets Initiative (SBTi). Science-based target setting helps companies that are serious about preventing the worst effects of climate change to create ambitious, credible, and clearly defined emissions-reduction pathways ahead. Staying in line with the latest climate science showcases a commitment to reducing total GHG emissions, using resources efficiently, investing in renewable energy, and adopting new ways of conducting business.

Notably, GHG emissions are segregated into three categories, formally known as scopes. Scope 1 involves direct emissions from onsite manufacturing activities, heating, cooling, and refrigerants. Scope 2 includes indirect emissions from purchased electricity. And scope 3 encompasses supply-chain emissions — e.g., from upstream and downstream activities such as business travel, employee commuting, transportation and product shipping and distribution.

Figure 2 shows a target-setting plan announced in PCI Pharma Services’s latest ESG report. As shown, the commitment has been made to reduce scope 1 (direct) and scope 2 (indirect) GHG emissions intensity by 40% (a figure normalized to revenue) by 2030. To give that promise real teeth, the pledge included signing a commitment letter with the SBTi to submit targets for verification this year. Plans also are in place to reduce energy intensity by 50% and to use 100% renewable energy, both by 2030.

Figure 2: PCI Pharma Services’s reporting period in the 2023 fiscal year (FY23) included several new sites, accounting for the increase in total energy consumption from FY22 to FY23. Overall energy-consumption intensity declined, however.

Assessing company-related carbon footprints, determining energy usage, and establishing formal targets are crucial first steps. However, tangible efforts to keep global warming below 1.5 °C above preindustrial levels by 2030 require companies to go beyond their four walls and focus on the wider value chain. After all, value chains often account for the vast majority of a company’s carbon footprint.

All of that presents an understandably sizable challenge. It can involve a number of external entities that are associated with a pharmaceutical company but are, by no means, under its explicit control. Considering that, setting firm goals could

require longer lead times. Extended lead periods can give pharmaceutical companies ample time to set and enforce ESG requirements for doing business, understanding that supply-chain interruptions would be nonstarters.

Making ESG Matter

To define actions that will result in the achievement of scope-1 and -2 reduction targets, an all-hands-on-deck approach is typically best. Such an approach includes soliciting ideas from employees, researching industry best practices, and identifying the highest-impact action plans. Here are some examples:

• creating and updating policies requiring new purchases and processes to consider environmental impacts in line with targets

• changing all facility lighting to lightemitting diodes (LEDs)

• implementing leak detectors for energy-intensive systems, including those requiring compressed air

• implementing refrigerant-use tracking and reporting systems along with traffic-light systems to switch off equipment that is not in use.

As companies delve more deeply into their scope 3 baselines and prepare to submit targets for SBTi validation, they can begin working on longer-term goals. Examples include the following:

• identifying relevant scope 3 categories using publicly available and internal spend data to capture scope 3 measurements (and selecting credible partners for data accuracy and progress towards net-zero strategies)

• updating company policies and procedures to reflect ESG commitments and outline expectations to reach targets

• assessing carbon footprints of topspend suppliers through ESG assessments and identifying opportunities for emission reductions, training, and collaborations

• prioritizing suppliers that align with the pharmaceutical company’s ESG vision, commit to science-based targets, and comply with a set of internally produced standards for suppliers.

Clearing ESG Hurdles

Every company around the world should reduce its carbon footprint across both internal operations and associated supply-chain relationships. Pharmaceutical companies have the added challenges of restrictive regulatory environments and a general lack of cohesive ESG standards. However, it is possible to clear those hurdles — even comfortably.

Internally, companies should assemble multidisciplinary teams that are specifically dedicated to ESG, then conduct double-materiality assessments to identify stakeholder priorities and establish short- and long-term goals. From there, those teams can partner with leadership to develop ESG strategies that can result in meaningful, measurable action. Aligning with global frameworks such as the SBTi, Race to Zero, and the We Mean Business Coalition can offer another level of credibility for companies that are committed to having a positive influence on the environment. By sharing ideas and working together as an industry, we can not only change the narrative around the pharmaceutical industry’s commitment to ESG, but also cultivate long-lasting benefits.

Reference

1 Padbidri A. How Can the Global Healthcare and Pharmaceutical Industry Reach Net Zero? South Pole, 17 April 2023; https://www.southpole.com/blog/how-can-globalhealthcare-and-pharmaceutical-industryreach-net-zero.

Gigi Bat-Erdene is global ESG program manager for PCI Pharma Services; 3001 Red Lion Road, Philadelphia, PA 19114; [email protected].