First published in our Biotech Review of the Year publication (Issue 10).

The intention is to make businesses with a presence in the EU more accountable by requiring publication of transparent information about how they impact the environment and society around them. The CSRD builds upon the Non-Financial Reporting Directive (NFRD), with a significant expansion of the depth and breadth of the reporting requirements to ensure that companies report reliable and comparable sustainability information.

It is expected that almost 50,000 companies will be subject to the CSRD, as opposed to the approximately 11,000 companies that fell within the remit of the NFRD[1], which is a relatively small number given the total amount of companies established in the EU. Nevertheless, it is likely that a larger number of biotech companies will fall within the scope of the CSRD going forward.

The new reporting requirements will be phased in over the next 5-6 years, starting on 1 January 2024 (depending on the size of the company), and require large companies and listed SMEs to gather data and publish such information (in the subsequent financial year) in the form of a Sustainability Report (as part of their Management Report). The CSRD stipulates that the Sustainability Report is to include information that is forward-looking and retrospective, qualitative and quantitative, and based on conclusive scientific evidence, where appropriate.

The CSRD is just another reason why internal SESG corporate compliance initiatives are becoming much more important and arising much more frequently in boardroom discussions, as businesses try to effectively manage related legal and reputational risks.

Reporting standards for the biotech sector

The technical advisory body involved in supporting the implementation of the CSRD (the European Financial Reporting Advisory Group, EFRAG) has published the first set of European Sustainability Reporting Standards, which describe four SESG reporting areas: i) governance structures; ii) corporate sustainability strategy; iii) impact, opportunities and risk management; and iv) other assessment-related information and targets.

Each reporting area is divided across three layers of disclosure, which are referred to as “sector-agnostic” (to apply to all companies subject to the CSRD), “company-specific” and “sector-specific” categories, with the sector-specific disclosure requirements currently under development. In the summer of 2022, EFRAG sought expertise from the pharma, biotech and medical devices industries to develop sector specific standards, and so it seems highly likely that these sectors will be caught.

In addition, there are also a number of standards that can be voluntarily supported by businesses. For example, in the pharmaceutical industry, the Pharmaceutical Supply Chain Initiative has published the PSCI Principles, which set out what it thinks should be the industry’s standards relating to human rights, ethics, labour, health and safety, environment and related management systems.

The importance of sector-specific SESG reporting requirements is vital to reach a more consistent approach for reporting SESG data, making it easier to draw fair and effective comparisons. The current lack of a standardised and generally recognised measurement system is perhaps the biggest threat to effective SESG disclosures. No wonder, then, that current SESG reporting among many biotech companies is limited.

Environmental factors

The environment and climate change are currently two of the biggest focuses for investors, and sectors such as the oil and gas industries, the (fast) fashion industry or the agriculture sector are at particular high risk. However, the biotech industry cannot put environmental and climate change initiatives on the back burner, even if it is at a less high risk relative to other sectors.

One of the key factors that particularly affects the biotech and pharmaceutical industries is the impact of manufacturing operations, including up the supply chain. Companies should start thinking about how they can measure their emissions and put structures in place to collate that information, which will allow them to assess their direct impact on the environment as an organisation, as well as engaging with its key suppliers and customers to measure emissions they create indirectly throughout the value chain. This should allow companies to identify any obvious areas that are causing a disproportionate environmental impact, report effectively and take steps to address the issue.

Social concerns and governance

The pandemic highlighted the socio-economic damage that can result when there is limited access or affordability restrictions of medicines. Companies in the biotech and pharmaceutical industries are generally being encouraged to engage with each other and public authorities and consider how to address this issue.

Under the CSRD, companies will also be required to reflect internally on their workforce and ensure that they are monitoring diversity and inclusion statistics, including equal pay and human rights – for example tackling modern slavery in its business and through its supply chains. SESG corporate governance will be most successful when it involves all groups within the company so as to identify any institutional changes that need to be made to a company’s culture or ethics.

Looking beyond the EU, in the summer of 2021, the US Securities and Exchange Commission approved Nasdaq’s proposal to amend its listing standards to encourage greater board diversity and to require board diversity disclosures for Nasdaq-listed companies. Subject to transition periods and limited exceptions, Nasdaq-listed companies are required to publicly disclose board-level diversity statistics on an annual basis using a standardised matrix template. They also have to have a minimum of two diverse board members, or explain why they do not have them.

With young talent becoming more sensitive to SESG and more likely to consider seeking employment at a company with good SESG credentials, the biotech industry is not badly positioned when it comes to social and diversity reporting. Some studies[2] suggest that biotech companies are currently better at disclosing data related to social factors than information related to corporate governance initiatives for the benefit of the environment. This is probably due to greater availability of some of the social metric data.

Why is SESG monitoring and compliance important?

The trickiest part of SESG for biotech companies is, without a doubt, the pricing of therapies and medicines, given its potential to detrimentally affect the organisation’s SESG performance. This is particularly so as pricing sustainably has become central to the social debate and healthcare policymakers, especially after the pandemic.

The impact that biopharmaceutical companies can have on society is of the highest relevance, given the potential to save lives. With public perception of the biopharmaceutical industry at its highest as a result of the industry’s reaction to the pandemic, demands around SESG will only become more challenging and complex for the biotech sector in the coming years.

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[1] Sustainable Finance and EU Taxonomy: Commission takes further steps to channel money towards sustainable activities

[2] Biotech’s ESG Crossroads