What can life sciences companies do to ensure they toe the line when it comes to ESG?

Over the past decade, the focus on ESG (Environment, Social and Governance) has intensified, particularly in the EU and the UK. Demonstrating strong ESG credentials in life sciences businesses is no longer a “nice to have”; rather, it is imperative.

So what can life sciences companies do to protect themselves and minimise the risk of finding themselves on the wrong end of an ESG-related claim?

ESG litigation can take many different forms and includes claims based on breaches of director’s duties (such as, the failure to act in the best interests of the shareholder), claims against companies for polluting or causing damage to the environment and claims seeking to enforce climate standards or challenge greenwashing (i.e. making false or misleading statements about the environmental benefits of a product). A shifting regulatory landscape globally is in many respects paving the way for claimants to formulate claims and hold to account those businesses who have not been treading the line.

Life sciences companies are coming under increased scrutiny when it comes to ESG. Pharma supply chain and procurement processes are notoriously energy intensive and use high volumes of the world’s water supplies. In addition, the amount of chemical waste produced during the drug manufacturing process is substantial. A study conducted by My Green Lab in 2021 (available here) indicated that the global biotechnology and pharmaceutical industry has a significant carbon footprint (197 million tonnes of carbon dioxide equivalent), which is more than the forestry and paper industry, and equal to nearly half the annual carbon output of the United Kingdom. A more recent study published by My Green Lab in 2023 (available here) states that, at the time the report was published, 53% of the largest companies by revenue in pharma and med tech have committed to the UN-backed Race to Zero, up from 46% in 2022. These companies have pledged to cut total carbon emissions by 50% by 2030 and reach net zero emissions by 2050 or sooner. Larger companies have a wealth of resources to help them meet these targets. However, for many smaller pharma companies, reducing carbon emissions presents even more of a challenge.

The costs to pharma businesses of “getting ESG wrong” are high, potentially resulting in not only financial damage, but also reputational harm affecting the entire company, damage to recruitment capabilities and potential disruption from activists. Now, more than ever, life sciences companies should be wary when making environmental claims to ensure they are in fact correct, not misleading and comply with the latest relevant guidance. Companies should be mindful that the regulatory landscape is changing rapidly – those currently treading the line may well suddenly find themselves on the wrong side of new legislation and exposed to potential legal action.

So what steps can life sciences businesses take to ensure they stay ahead of the evolving regulatory landscape? It may sound obvious but the key to success in the ESG sphere is preparedness. Practical steps life sciences companies can take to mitigate the risks of ending up on the wrong side of an ESG claim include:

• Reviewing the environmental footprint of their products with a view to reducing waste and pollution.
• Ensuring that any green claims are properly substantiated. It would be wise to keep detailed records of all steps taken to verify ESG-related statements to provide proof that the company believed in the accuracy of the statements when they were made.
• Avoiding the use of acronyms and legal jargon in ESG disclosures. Instead, use plain and clear language that can be easily understood by investors and/or consumers.
• Obtaining expert advice: Legal teams should be closely involved in shaping public documents including prospectuses, annual reports and other investor communications. It is important to ensure that well documented steps are taken to verify the accuracy of all ESG statements and directors should personally satisfy themselves of the adequacy of all ESG statements.
• Keeping insurance policies under review to ensure they provide adequate protection for the firm and directors in case they face future claims.

There are lots of other steps that life sciences businesses can take to stay ahead of the regulatory curve to avoid exposure to ESG-related claims. Prevention is undoubtedly better than cure. Stevens & Bolton can support life sciences companies from the very beginning of their sustainability journeys by working with them on an ESG audit. More information is available here.