ESG considerations in Europe and Asia: social inclusion – the new diversity frontier in life sciences

The last several years have presented employers in the pharmaceutical industry with a challenging, rapidly changing landscape. With the advent of social movements such as #MeToo and Black Lives Matter, and the impact of the COVID-19 pandemic, the priorities and concerns of employers are shifting significantly.

This evolving focus is clearly visible in the growing emphasis now placed by many global businesses on environmental, social and governance (ESG) issues – and especially the ‘social’ element. Although measuring the ‘S’ in ESG is, in many ways, still in its nascent stages, the exponential growth and development in this area should make it a key consideration for life sciences employers.

The broad landscape

ESG is an umbrella term for the tools used to measure the sustainability and ethical impact of a business.

Although ESG factors are largely non-financial, potential investors, customers and employees often consider a business’ ESG performance when deciding whether to invest their money or time in a given business.

In particular, businesses have started to focus on incorporating the social (S) limb of ESG into their organisational governance and compliance frameworks. The S covers, broadly, how businesses treat their workforce, how they interact with their local communities and how their supply chains are composed and operated.

Although there are currently no set metrics or prescribed areas of focus, there are several key areas that pharmaceutical companies can pinpoint when measuring the S in ESG. These areas include:

• Human rights (including modern slavery and child labour) – certain businesses are required to identify the steps that they have taken to prevent any involvement in human rights violations, such as modern slavery or human trafficking. For pharmaceutical companies, ensuring that human rights are protected by offering transparency and performing due diligence in global supply chains is key.
• Health and safety – the COVID-19 pandemic has thrown into sharp relief the significance of safe working environments, including the importance of employee mental health and wellbeing.
• Diversity and inclusion – pharmaceutical companies may be required to comply with certain legal requirements relating to topics such as inclusion and non-discrimination. Additionally, employers in the pharmaceutical industry in Europe and Asia are beginning to recognise the benefits of improving diversity in healthcare by ensuring that under-represented groups appear in clinical trials, healthcare datasets and the algorithms that rely on these datasets.
• Equal pay – certain employers operating in particular jurisdictions are required to report on their gender pay gaps and the measures they take to achieve equal pay between men and women and, increasingly, between different racial and ethnic groups. There is also growing pressure on employers to undertake voluntary reporting on their ethnicity and disability pay gaps.
• Stakeholder and community engagement – pharmaceutical companies are aware that stakeholders often have a keen interest in whether and how businesses contribute to causes that stakeholders value. Accordingly, many employers in the pharmaceutical industry are developing robust corporate responsibility programs focusing on topics such as ensuring that healthcare and life-saving medicines are accessible in lower-income countries.

Why the S in ESG is important

There are several key reasons why focusing on social issues is important for employers in the pharmaceutical industry:

• Reputation and value: businesses that fall below expected ESG performance standards will suffer reputationally. Demonstrating a commitment to social issues can help employers avoid costly, and often unquantifiable, reputational damage. Strong ESG policies also attract investments.
• Productivity: employers that maintain a diverse and inclusive workforce, policies addressing equal pay, and similar strategies have better productivity, including higher revenue growth, greater innovation and increased employee morale and retention rates.
• Legal compliance: as discussed in more detail below, the regulatory environment is changing rapidly, and many jurisdictions are on the cusp of implementing additional and more comprehensive reporting duties for global employers. Those organisations which demonstrate good ESG policies now will be far better placed to comply with future regulatory developments and avoid penalties.

Measuring the S in ESG

A key challenge faced by employers in the pharmaceutical industry is the lack of uniform standards for ESG reporting, in addition to the rapidly evolving regulatory environment. Nevertheless, it is critical for employers in the pharmaceutical industry to identify the risks and opportunities arising from S factors in order to safeguard their businesses. Employers should take note of the renewed emphasis on employer reporting on ESG factors in Europe and Asia. Furthermore, companies should be aware that regulators in Europe and Asia are gearing up to implement additional rules on ESG disclosures. Finally, employers can seek guidance by commissioning internal audits to assist them to make informed decisions about integrating ESG measures across the pharmaceutical industry.

Employer reporting in Europe and Asia

Reporting related to social issues remains largely voluntary in Europe and Asia. There are, however, some mandatory reporting requirements in certain jurisdictions. For example, in the UK, large private and voluntary sector employers (those with at least 250 employees) are required to analyse their gender pay gap each April – and the UK government has consulted publicly in relation to the potential extension of the pay reporting regime to ethnicity pay data. Employers in France and Germany must comply with similar gender pay gap reporting requirements.

Additionally, large commercial organisations that carry on business in the UK and have a total turnover of £36 million or more must publish an annual modern slavery statement on the actions they have taken to ensure their business and supply chains are slavery-free.

In France, all companies headquartered in the country and employing more than 5,000 employees in France, or headquartered in France or abroad and employing more than 10,000 employees worldwide, must implement vigilance plans. These set out reasonable measures to identify risks, prevent serious violations of human rights and fundamental freedoms, and protect the health and safety of persons and environment.

In Hong Kong, the Stock Exchange has introduced new initiatives and rules regarding gender diversity at the board level and reporting requirements on gender ratio in the workforce.  For example, all applicants for an initial public offering (IPO) after July 1, 2022 must identify at least one director of a different gender in their IPO prospectus.  This focus on gender diversity as part of ESG came out of the Consultation Paper on Review of Corporate Governance Code and Related Listing Rules issued in April 2021 which provides, “Delivery on good corporate governance practices and ESG measures is more than a box-ticking exercise… The change needs to begin with a shift of mindset at the top of organisations.”

In Japan, the Act for the Promotion of Women’s Participation and Advancement in the Workplace requires “large companies” to prepare and file with the government action plans to improve gender equality and publicise at least two types of data (selected from prescribed data items, such as the percentage of newly hired female employees, the percentage of female executives, the difference in average tenure between men and women, and the difference in overtime work between men and women).  Since April 2022, under the Act, companies that regularly employer more than 100 but less than 300 employees have been similarly required to prepare and file action plans and publicise at least one type of data listed above.

In China, the Law on Protection of Women’s Rights and Interests was promulgated in 1992 and last amended in 2018. The latest draft, if adopted in its current form, would, among many other provisions to protect and enhance the role and experience of females in the workplace, require companies to include information regarding gender equality in their annual reports, such as the promotion of the recruitment of females, the gender ratio in management and the gender ratio across the company’s workforce.

Beyond mandatory reporting, some pharmaceutical companies are taking steps to offer voluntary disclosures and set goals related to social issues. For example, the Pharmaceutical Supply Chain Initiative (PSCI), established to promote excellence in safety, environmental and social outcomes for the global pharmaceutical and healthcare supply chain, has more than 60 members worldwide. It has established the PSCI Principles for Responsible Supply Chain Management, which address five areas of responsible business practices, including ethics, labour, health and safety, environment, and management systems. The PSCI encourages commitment and accountability, as well as documentation.

Further, the EU has implemented several voluntary mechanisms encouraging certain large corporations, public bodies and non-profit organisations in EU member states to report on ESG policies and performance, such as by signing diversity charters, or complying with Directive 2014/95/EU (the Non-Financial Reporting Directive (NFRD)).

Changing regulatory expectations

As mentioned, regulation related to reporting on social issues seems likely to increase.

United Kingdom

In the UK, diversity and inclusion reporting is taking centre stage. Although there is currently no requirement to carry out diversity and inclusion monitoring in the UK, this seems likely to change. For instance, many organisations are increasingly reporting on any pay gap due to race and ethnicity. Although such reports are not yet mandatory, many anticipate that mandatory reporting requirements around these areas are imminent. The government held an ethnicity pay reporting consultation in 2018 that closed in 2019 and, although a response is yet to be published, one is expected soon.

Asia

Notably, in Japan on June 7, 2022, the Prime Minister adopted the “women’s version” of the government’s basic policy of 2022 that plans to require “large companies” (those companies employing more than 300 employees) to disclose their gender wage gaps from this summer.  The requirement will be implemented by amending the governmental order or ordinance under the Act for the Promotion of Women’s Participation and Advancement in the Workplace.  No draft ordinance or order has been publicised as of the date of writing this article.  At the same time, the Financial Services Agency is considering requiring listed companies (and certain non-listed companies that are required to file securities reports) to disclose the percentage of female executives, the percentage of male employees taking childcare leave and gender wage gaps in their securities report.  No draft ordinance or order has been publicised as of the date of writing this article.

Across Asia, broadly speaking, increasingly more employers are trying to collect diversity and inclusion reporting information. In addition, employers in the life sciences sector, and the pharmaceutical industry more specifically, across Asia are increasingly trying to gather data internally on any pay gap issues in order to be more competitive and to align initiatives across their global footprints.  Employers who do try and collect this data voluntarily also need to be aware that this collection often triggers express jurisdiction-specific sensitive personal data requirements across the region.  They also need to be aware that most jurisdictions in Asia are still culturally conservative and, depending on context, such questions may be seen as overly intrusive or even insensitive. Further, some jurisdictions also still criminalise various aspects of same-sex relationships, so employees may be extremely sensitive or cautious about sharing this information, and employers should understand the possibility that a government could request access to this information for reasons that are inconsistent with the promotion of diversity and inclusion.

Internal audits

A key tool used to provide organisational leadership with reliable assurance on the effectiveness of ESG management, including ESG governance, risk assessment, monitoring and reporting, is internal audits.

Independent audits of ESG reporting are not typically required in Europe or Asia. Regardless, internal audit functions are becoming a key tool for assessing internal frameworks, validating the completeness and accuracy of data used in reporting, and providing assurance and advice around ESG reporting.

Accordingly, many jurisdictions are seeing increased emphasis placed on the processes and methods by which businesses measure and assess progress on ESG issues. In May 2021, the Institute of Internal Auditors Global (IIA) published a whitepaper concerning the role of internal audits in ESG reporting and expressed its view that, as “ESG reporting becomes increasingly common, it should be treated with the same care as financial reporting”. It further added that organisations “need to recognise that ESG reporting must be built on a strategically crafted system of internal controls and accurately reflect how an organisation’s ESG efforts relate to each other, the organisation’s finances, and value creation”.

It is expected that employers will continue to rely on internal audits to support and bolster their ESG regimes.

Conclusion

Clearly ESG considerations are becoming a key priority across the globe, as regulators, investors, employees and other stakeholders increasingly expect companies to report on how they impact the world around them. Allowing such stakeholders to understand an organisation’s value creation beyond its financial performance is becoming a critical issue and by doing so, pharmaceutical companies can attract the best and brightest talent.