Bringing the ‘E’ and the ’S’ together

Boards are still coming to terms with the policies and action needed to play their part in protecting the environment while there is ever increasing pressure for corporates to ensure their impact on people and communities is for the good. 

Policy makers, regulators, asset owners, investment managers, ratings agencies, and employees now closely monitor the outcomes of corporate behaviour. Companies and their boards are under a spotlight.

Pharmaceutical and healthcare board members are just as much under scrutiny as any other sector. Perhaps more so as their products and policies are examined for social goods, and their production processes for impacts on human rights and the environment.

But it would be a mistake to assume these two facets of ESG—environment and social—are forever separate and entirely unconnected. Indeed, it’s now increasingly clear that the bonds between the two run deep

Managing both as if they required entirely different approaches and policies is therefore no longer an option. As the ESG concept evolves and rule makers develop their policies, organisations in the healthcare and life sciences sector will need to consider environmental and social impacts as intrinsically linked. Damage to the environment inevitably has consequences for people and communities.

Sadly, recent history reveals many examples of relationships between corporates and communities going wrong via the environment. In 2015 analysis by the Centre for Science and Environment, an Indian not-for-profit found a number of pharma companies were responsible for dumping effluents and hazardous waste into water courses in the city of Hyderabad. Other reports have found “excessively high” levels of antibiotics and anti-fungal drug residue in the city’s water sources.

In Brazil research found evidence of pharmaceuticals in the Amazon river including psychostimulants, analgesics and hormones. 

Yet another study concludes that pharmaceutical companies are some of the main polluters causing more than 40% of the world’s rivers to contain drugs.

Pharmaceutical pollution makes for sobering news. But it also underlines why environment and social aspects of corporate conduct are closely related. Companies with a poor environmental record may have a negative social impact such as harming the health of employees, customers, or those living near production centres. Pollution can create a vicious circle of damage: as it harms biodiversity it then potentially harms human health.

This is an inescapably important consideration as pharma and healthcare companies consider how to reduce their impact on the environment and on people.

Moving a production centre to tackle emissions may have a negative impact on people and communities that lose their livelihood. And while it might be tempting to move production to jurisdictions with lower regulatory standards, companies may just be shifting poor environmental behaviour, and its consequences, from one community to another.  

New reporting rules will make this increasingly difficult to hide. Brussels has recently introduced the Corporate Sustainability Reporting Directive (CSRD),and is finalising the Corporate Sustainability Due Diligence Directive (CS3D), which will soon impose new rules mandating due diligence for human and environmental impacts. In particular the CS3D means companies will need to report on their efforts to monitor and improve their record on human rights and environment.

Meanwhile, the UK has introduced TCFD (Taskforce for Climate-related Financial Disclosures) for large companies that will introduce new reporting rules for environmental risks.

Crucially, all the EU developments employ at their heart the principle of “double materiality”. Companies must report not only how sustainability risks affect their business prospects, but how their business models affect the outside world—people, communities and the environment.

It is these reporting rules, and the use of double materiality, which mean that boards will need to understand how environmental impacts will affect people.  If an EU company’s pharmaceutical plant leaks or releases effluent into a water course, it will need to consider, not only damage to the environment—the landscape, water and biodiversity—but the impact on local people if it wants to be in compliance with the new disclosure standards. Following understanding will also be the requirement to cease, prevent, mitigate or provide remedy.

New reporting rules also mean companies can no longer view their relationship with the environment and people through the narrow prisms of local regulation and labour laws. Local standards may be much lower and offer far less insight than the reporting rules. Or they may lack enforcement.

This will be a big change and constitutes a major incentive for companies to consider environmental and social risks as indivisible. 

And while large UK companies must apply TCFD reporting, they cannot bank on being excluded from EU rules. Expected to be in force in the next two to three years, the directives have been designed to ensure that any company trading in the EU, and within scope, will have to comply. Those who supply EU companies will be likewise caught.

That means it is now vital for boards to move their companies on from looking at the world through a “single materiality” lens.

It’s also worth noting that all these changes mean that around the world “voluntary” reporting on ESG is coming to an end. Built upon principles that go back to UN Guiding Principles on Business and Human Rights (UNGPs), and OECD Guidelines for Multinational Enterprises on Responsible Business Conduct the reforms represent a trend for non-financial reporting to become mandatory.

Many companies are likely underprepared for this shift and would do well to prime themselves by reviewing the expectations laid out in the UNGPs and the OCED Guidelines for Multinational Enterprises.

Permanent change will entail making the new reporting environment business-as-usual. Linking environmental and social impacts should, likewise, be part of standard operating procedure.

Skills, competencies and incentives, particularly in the c-suite and boardroom, should be reviewed and, if necessary, updated or recruited.

Policy makers will continue their battle against climate change, expectations of companies and their social responsibilities have changed dramatically. New reporting rules reflect this shift. There’s no going back.

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