Biotech and ESG: Does saving lives get you extra credit? (and other musings)
by Daphne Zohar
Daphne Zohar is the founder and CEO of PureTech Health, a biotherapeutics company that has created 25 novel therapeutics for serious diseases.
December 9, 2021
When investors care about a certain metric related to the running of a business, that metric tends to be measured quickly. It may even be audited to make sure companies are conducting all activities above board. Because investors care about financial performance, for example, companies must disclose a raft of financial figures, including standardized measures set forth in a prescribed presentation.
Today – as opposed to say, ten years ago – investors also care a lot about good corporate citizenship, which is generally measured through what’s referred to as “environmental, social, and governance framework,” or ESG. The growing emphasis on ESG has begun to reshape how companies as disparate as sneaker manufacturers and rental car chains approach their business.
If, like most people, you care about the causes under the ESG umbrella, such as workforce diversity or human rights or climate stewardship, this is a good thing, or at least seems to be. Consider the investor who doesn’t want to invest in fossil fuel companies because of their impact on the environment. While that well intentioned investor has voted with their feet, they now no longer have a say in how those companies act.
So where does the biotech industry fit in? The companies that make up our sector are devoted to saving and improving peoples’ lives by discovering and developing new drugs. So how do we measure the merits of the inherent societal good that biotech companies do against a heterogeneous backdrop of energy, retail, financial services, entertainment, and dozens of other industries (each of which may make their own claims to some mantle of ESG prominence)? And how do individual companies allocate resources toward tracking and reporting or even implementing additional ESG practices when those resources might be better spent on their core business that is inherently ESG focused?
As the CEO of a company that cares deeply about being a conscientious global citizen in an industry where its intrinsic ESG bona fides should give it a leg up on most others, we welcome the focus on these issues. Unfortunately, the nascent processes for designing ESG measuring sticks are still a Wild West of competing ratings agencies, rigid reporting requirements, black box grading, and ambiguous and sometimes irrelevant metrics. And the specter of yet another bureaucratic reporting workstream – in an area that does not yet seem to recognize biotech’s unique societal benefits – can be frustrating and distracting for companies whose stated mission is to protect the long-term health of people around the globe.
PureTech is a relatively small clinical-stage biotech (fewer than 100 employees). Like many other biotechs, we can proudly say we’re dedicated to improving the lives of patients through the development of novel therapeutics to treat serious diseases. We’re publicly traded in the U.K. and U.S., and we issued our inaugural ESG report as part of our annual report in April 2021 (see pages 60-68). We take pride in our commitment to our people, our patients and our planet, and our team believes that we can only achieve our mission of delivering therapeutics where there is unmet need by building a sustainable business.
As a result of our UK listing, we’re required to report on greenhouse gas emissions and provide a variety of other climate-related disclosures. Even without those reporting requirements, we are committed to mitigating the environmental effects of our business by ensuring operating efficiency and limiting emissions and waste. But current disclosure requirements and guidelines imposed by regulatory and industry groups leave us with little flexibility to focus on or truly explain the benefits of our core ESG-related strengths and beliefs as a biotech company, including our strongly held values around diversity and inclusion.
We are culturally and gender-diverse as an organization and one of only nine companies in the FTSE 250 with a woman CEO. And we’re rated – very favorably! – by a handful of independent ESG ratings agencies. Those agencies’ ratings are then leveraged by proxy agencies who seek to influence the voting of our shareholders. But the basis for these ESG ratings is still evolving - often pulled by third parties from our public disclosures or requiring the completion of long, ambiguous questionnaires. Whether through public disclosure interpretation or questionnaire, it is difficult to provide accurate and comprehensive information and ensure that we are using the correct phraseology to receive “credit” for what we do. This is exacerbated by inconsistencies among the agencies in their rating matrixes and the specifics of what they expect to be included in disclosures.
It’s also worth noting that current ESG evaluations lack consideration for a company’s profile, such as its sector and size, and the absence of these nuances could create an uneven playing field. For instance, drug affordability is a key ESG initiative for many commercial-stage life sciences organizations, but clinical-stage biotechs will not be able to demonstrate activity in this area even if committed to affordability. What’s more, all of this reporting comes at a high cost to industry participants – consuming financial and management resources that might be better spent elsewhere, including on advancing the substantive programs being rated. The current ESG frameworks force companies like ours to confront a cost/benefit calculus with potentially misaligned incentives, rather than focusing on our core mission.
The unique ESG role of biotech
Looking beyond these tactical considerations, which will hopefully evolve to be more informative and less bureaucratic over time, the societal mission of biotech companies should be rewarded by ESG metrics. Not to take anything away from tech, or even the ESG-conscious sneaker and other consumer goods companies out there, but fighting diseases and protecting the planet from pandemics should score pretty high on the ESG-ometer. And we welcome a sector-specific focus on areas where all biotechs might be judged on an even playing field, like medicine affordability and access, animal testing, hazardous materials disposal, or any other ESG-related challenges facing our industry.
I’m also fairly confident that biotech would compare well with other industries on broader or more traditional ESG metrics. For example, the life sciences industry boasts a much higher level of ethnic diversity than national average in the US for the total workforce and an equal level in terms of gender diversity.
But allocating scarce and hard-won resources to ESG reporting could become onerous for small biotechs. Full-blown ESG reports are typically outsourced to multiple parties that handle reporting and auditing of specific metrics, often at substantial cost. Any management team would cringe at the thought of the cost and time that goes into financial reporting now being mirrored by ESG reporting. We’re better off spending that time and money to improving our already substantive programs those agencies are grading, or to actually developing lifesaving treatments. ESG frameworks should evolve so we don’t have to make that choice.
To be clear, disclosure is necessary, and we applaud the investor and societal focus on ESG and other initiatives that benefit society as a whole. But increasing regulation, varying expectations, and implementation of a one-size-fits all framework for reporting and disclosure have the potential to call for additional investment in disclosure (and potential system gaming) at the cost of substance.