Entrepreneur Academy

The first steps in implementing ESG practices in companies are to identify those risks and opportunities that would have a material impact on their ability to achieve its objectives. The process starts with establishing a pool of high priority ESG topics for life sciences that are material to those companies and all its stakeholders, especially to the investor community.

Let us start with the social component of ESG.

A major ongoing concern of many life sciences companies is related to employee engagement, including the ability to attract and retain diverse talent. If companies fail to retain or attract people, they will not be able to achieve its objectives. High staff turnover and poor employment practices are extremely costly and will impact the companies’ bottom line, future cash flows, ability to access finance, cost of capital and more.

The social component also touches on human capital, including diversity, equity and inclusion (DE&I). To assist with the identification of these risk factors and the transmission effects to the bottom line, CFOs must formulate a set of key questions related to this ESG topic. Companies should determine if they have policies and strategies for talent recruitment, employee promotions and retention and if there is a DE&I policy and strategy in place. If not, they should consider implementing them and establish a set of metrics and targets, such as employee turnover rates, both voluntary and involuntary, with emphasis on the context of the turnover. Other important metrics could be gender pay equity, workplace stress and mental health issues.

Another ESG topic that has a material impact for life sciences companies is clinical trials. They must be able to describe and disclose its approach to human rights, including informed consent and data privacy. They must also identify metrics for how diversity of the patient sample is being considered in trials and establish ethical standards for the treatment of enrolled patients throughout all the phases of the clinical trials.

There is also the issue of data security and privacy. Companies must be able to demonstrate and disclose that they have robust oversight mechanisms for data security, cybersecurity, data protection standards and internal controls. They should also be able to describe and disclose the identification and management of risks related to third-party vendors, and demand that the client’s supply chain abides by the same ethical and governance standards as its own company.

Another relevant topic that has been catching the attention of stakeholders and the investors at large is supply chain management. Companies must be able to describe and disclose their practices toward suppliers and contractors, including policies of responsible procurement, fair competition practices, standards and business practices. They also must introduce a supply chain code of conduct or a responsible procurement program that outlines a series of socially responsible practices including employment practices and environmental, health and safety requirements. Finally, they should also create criteria for due diligence in the supply chain and third-party risk management.

Governance also plays a role in life sciences with respect to business ethics, integrity and compliance. Companies must demonstrate that there are policies and procedures in place for anti-bribery, anti-corruption and anti-competitive practices, including marketing practices. They must also be able to capture any event that had a financial impact in the form of fines, penalties or sanctions.

In summary, companies with stronger ESG and sustainability practices will be better positioned to manage their resources more effectively, attract and develop human capital, manage innovation and tap into different markets and geographies, which will have a clear and sustainable influence in the bottom line—also increasing valuation. All paths lead to better and more sustainable financial and societal returns and better valuations in the longer run.

Implementing better ESG and sustainability practices, as just described, is good for businesses and for investors.