The chemical and life science sector is increasingly challenged by environmental, social, and governance (ESG) considerations, as companies are scrutinized and valued on the sustainability of their operations, amid more stringent regulatory requirements.
The COVID-19 global crisis, climate change, biodiversity considerations, depletion of natural resources, and advances in science and technology are just a few of the many issues facing the sector.
It is now more critical than ever for an organization to identify the risks and opportunities arising from ESG factors in order to safeguard its long-term viability and resilience.
While there is no definitive list of ESG risks for companies to consider, they typically include a blend of the following.
Environmental criteria examine an organization’s impact on the planet, which for the chemical and life science industries is especially relevant.
For pharmaceutical and biotechnology companies, actions taken towards growing a more resource-efficient economy include the sustainable sourcing of raw materials and chemicals, and the recycling of unwanted and unusable materials.
Monitoring and measuring the hazardous waste of a company’s activities are important to understanding how any negative impact it has on the environment, and the surrounding communities, can be reduced.
The sector is heavily involved in the manufacturing and transportation of materials — processes that inherently emit a significant amount of greenhouse gasses (GHGs). Steps taken by some companies to reduce GHG emissions across their supply chain — such as the introduction of more energy efficient fuels and processes — demonstrate growing commitment to addressing climate change in the sector.
Social criteria examine how a company treats and values its employees and broader communities. Considerations include the following:
- The impact a company has on the communities and biodiversity in areas where it sources raw materials.
- Whether it remedies or implements actions that address the residual and adverse effects of its business operations.
- Its commitment to product quality and health and safety.
- Steps an organization takes to ensure healthcare and life-saving medicines are accessible in lower income countries.
Given incidences of data breaches in the sector, it is also important that a company fully understands how regulations surrounding the privacy of protected health information impact its business.
Governance criteria examine a company’s corporate governance practices and policies. It is critical that the governance of organizations within the chemical and life science sector adheres to high ethical standards and regulatory requirements, similar to those in place in the development of new drugs and medicines and manufacture of medical devices.
Sound governance is essential to maintaining the sustainability, efficiency, and quality of a company’s operations. A stringent level of compliance within the sector helps build transparency and trust with stakeholders, patients, government, industry bodies, and society. Therefore, it is crucial to integrate governance considerations into short- and long-term business strategies and board-level decision making.
Survey finds low levels of preparedness for ESG factors
In a recent survey by Marsh, 75% of respondents in the sector ranked climate change and ESG as either an important, or the most important, issue for their operations.
However, over 80% of respondents do not consider their stress testing of financial impacts from climate threats to be comprehensive, with 41% saying they do not carry out stress testing across their current and future operations at all.
Climate-related risk is an ongoing and evolving challenge for the sector, especially when the effects of climate change, natural catastrophes, and extreme weather events impact the environments where materials are sourced or where operations are carried out.
These findings highlight the urgency for companies to integrate climate risk assessments into a business strategy that will support organizational agility and resilience, reduce costs, and ultimately increase business value.
ESG strategy is vital
Protecting natural resources and addressing social and governance factors across the planet is essential to building economic stability and prosperity. However, there is a lot of work to be done to convert awareness and concern into clear science-based targets, robust strategies, and effective actions.
Companies can take the following key steps:
- Assess the implications of ESG by utilizing industry data, risk indices, physical climate models, and key stakeholders’ perspectives.
- Analyze and establish the means to control the physical, transition, and reputational risks associated with ESG for an organization.
- Analyze the requirement for external reporting.
If you have questions on your ESG and climate change risk, please contact your Marsh advisor.