Working in life sciences you probably think you are doing the right thing, right? We are witnessing life sciences companies leading us out of the pandemic, with vaccines, medicines, diagnostics, medical devices, and digital health apps. Quite literally saving the world. And if anyone has been making a difference to daily lives in cancer, rare diseases, heart diseases, infectious disease, mental health and more it is our sector, front and centre. But do investors see it that way? Are we really doing the right right things in their eyes?
Optimum hosted a session for Life Sciences companies and VCs with Alex Rowe, Sustainable Equities Portfolio Manager, and Daniela Dorelova, ESG Investment Specialist, from Nomura Asset Management on how investors look at ESG investing. Alex and Daniela explained how potential investments are increasingly assessed against environmental, social and governance criteria (ESG), which are also referred to as ‘sustainability’. Nomura Asset Management manages a Sustainable Equity Fund, which collects and curates a myriad of ESG metrics that are fundamental to informing investment decisions. To be credible and investible, ESG is becoming critical to the fund manager’s perspective, as investors shift further towards sustainable investment.
Investing for impact
Increasingly, investors at scale, such as pension funds, want to invest in companies that are making a positive impact on things that really matter, and are addressing, or at least not making worse, pressing societal challenges such as climate change, biodiversity collapse, and that most unwelcome recent addition: pandemics.
Global asset managers and owners with more than $100 trillion collectively in assets under management have in recent years signed up to the ‘Principles for Responsible Investment’, a UN–backed initiative to encourage investors to use responsible investment to enhance returns and better manage risks. ESG is at the core of the PRI’s six principles which aim to help investors to back companies that are making a positive impact on our world. It is much more than just a tool for assessing risk and return, weighing up monetary and non-monetary (including reputational) impacts. Nomura’s view is that ESG is about doing what is right.
It is wrong to think of ESG as just something relevant to global corporates. Whilst large public companies can have massive societal impact, every organization has some impact, and for those that have big plans, like many will in life sciences in 2021, it pays to dress for success and proudly wear ESG colours. At Nomura, the company has defined six impact goals, and assesses how a company’s existence makes a measurable difference. In life sciences, two are specifically relevant: eliminating communicable diseases and mitigating the obesity epidemic.
Good governance leads to great companies
If you are involved with a company’s IPO, the first ESG element you will encounter is the last letter: G for Governance. Before a company lists, trust in the management of the company, which can be reflected by governance structures, is what investors look at most. If you do not think this important, remember that last year’s biggest planned IPO, for $35 billion, for ANT Group Co, was pulled due to governance issues. Factors to pay attention to here include the diversity of board and management teams, transparency on holdings and ownership, and remuneration of the C-suite, and how that is linked to positive outcomes across ESG.
Listed companies employ an army of people to respond to ESG surveys – which can run to hundreds of pages – typically spending £millions a year to keep ratings up. As a company grows, so must its footprint, and that is where the Environmental element of ESG can become the most significant. It is also one of the easier things to measure, and as what can be measured is counted, pay attention to reducing, for example, the tonnes of CO2 your organization emits. Companies often neglect to consider the significant impact their physical footprint can have on the environment, with around 30% of emissions coming from buildings. Not having a policy about how you are addressing ESG elements, especially ones such as climate change, can destroy ESG ratings. When 2020 is assessed, emissions from empty office HQs will have reduced due to everyone working from home. Now is the time to think about the return to our offices, and how they can be refitted to be made more environmentally friendly, such as making more use of renewables, as part of a general societal desire to become carbon neutral. Are the lights off in your empty offices and labs?
Avoid making bitter pills
The Social element can be very wide ranging, with metrics relating to customers, suppliers, diversity, health and safety, and the general treatment of employees. What difference are you making in your local community? In our sector, a few specific positive elements stand out, which are relatively easy to measure, such as number of people reached by a medicine, or spend on R&D. But there are negatives too: In the US, due in part to egregious pricing decisions on several medicines, pharma had become one of the most loathed sectors. Now that some are producing Covid-19 vaccines, the sector has acquired a halo. But angels can fall. What are you doing to ensure access to medicines at a fair price? Paying close attention to your social elements can be transformational.
It is not just investors who consider ESG – your employees will likely have interests in some of the elements, sometimes passionately so, which means you should also remember your internal communications when talking about your ESG efforts. Companies can always do better to communicate a compelling narrative about the positive impact of what they are doing, and why their existence matters.
It is down to individuals to drive their companies to make a positive impact on the world and ESG is the measurement by which everyone can assess this.
Now go do what is right, right?
Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect those of Nomura Asset Management.