All Things Newz
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Life Sciences ESG Reporting Practices – Securities

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For companies of all industries, ESG matters have become an area
of intense focus. In addition to investor and activist pressure, the growth of ESG ratings – and proposed climate and broader ESG disclosure requirements in the US, EU and
other jurisdictions – have led many companies to consider
beginning or expanding ESG reporting efforts. For life sciences
companies, however, ESG reporting is often a particularly
perplexing subject. Investor focus on ESG matters is generally a
more recent phenomenon for industry companies that also often are
unsure which ESG topics are relevant to their business, especially
earlier-stage companies. We have prepared this report to help life
sciences companies begin to answer such questions and provide
insight into industry disclosure practices.

Cooley analyzed 45 environmental, social and governance (ESG)
reports from US public biotech and pharmaceuticals issuers
published in the past year. The data below is limited to disclosure
in stand-alone ESG, sustainability, corporate social
responsibility, or similar reports –including dedicated
reports under reporting framework templates, such as Sustainability
Accounting Standards Board (SASB) or CDP disclosures – and
does not include disclosure in Securities and Exchange Commission
(SEC) filings. However, in nearly all cases, issuers included
significantly more information in such reports than in SEC filings,
and it is extremely rare for SEC filings to contain more extensive
quantitative or qualitative ESG disclosure.

Of the 45 reports analyzed, 44 are from Russell 3000 issuers. As
a general matter, the production of stand-alone, voluntary ESG
reports is heavily concentrated among large-cap mature life
sciences companies with numerous commercialized products and annual
revenues of $500 million or more. Nonetheless, our survey includes
nine companies that we classify as “early stage,” which
includes clinical-stage companies and early commercial-stage
companies with two or fewer approved products and revenue of $75
million or less, as well as seven intermediate commercial-stage
companies with two or fewer products and revenue between $75
million and $500 million. There has been a significant increase in
industry reporting over the past 18 months, and inaugural
publications constitute the large majority of intermediate- and
early-stage reports. Given general market trends, and with many
smaller companies either preparing or planning for ESG reports, we
can reasonably expect a continued increase in the volume of
reports, levels of quantification and earlier-stage reporting over
the coming year.

Quantitative environmental disclosure

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The table above focuses exclusively on reports that provide
quantitative disclosure on environmental metrics – it does
not include reports that provide only narrative descriptions of
company practices, commitments or philosophies. All mature company
reports include at least one quantitative environmental reporting
metric, and mature companies represent 86% of all examples of
quantitative reporting.

Quantitative environmental reporting examples

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Environmental issues are generally less material for life
sciences companies, particularly companies that lack significant
in-house manufacturing operations or complex supply chains.
Nonetheless, partially driven by cross-industry market practice and
investor expectations, inclusion of environmental disclosure in ESG
reports is common in life sciences reporting. Although less heavily
weighted than for other industries, environmental matters generally
feature in ESG ratings methodologies applied to life sciences
companies. In addition, as the ESG subject perhaps best suited for
quantification, environmental disclosure includes some of the most
standardized performance metrics, which facilitate company
comparability.

Most likely due to the relative ease of tracking, energy and
water use are marginally more common topics than greenhouse gas
(GHG) emissions, though we may expect this to change as companies
expand their emissions-tracking capabilities in anticipation of
finalization of the SEC’s climate change rule. Scope 3
(indirect value chain) emissions disclosure remains relatively
rare, as such emissions often are considerably more difficult to
measure or estimate.

In addition to concerns about potential inaccuracies, for many
life sciences companies with outsourced manufacturing operations
and significant chemical supply chains, Scope 3 emissions
disclosure may present a less positive view of company
environmental impacts. In addition, many reports analyzed were
published following the release of the SEC’s proposed climate
change rule in March 2022, which may have created concerns that
publishing Scope 3 data could create future SEC reporting
obligations.

External review of ESG reporting

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References to third-party assurance of ESG data remain
relatively rare. Disclosure in ESG reports may not capture the full
extent of external audits, as companies often engage outside
consultants or auditors to provide assurance for internal comfort
purposes only.

ESG reporting frameworks referenced

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A large majority of reports included references to the role of
reporting standards in shaping disclosure, though such standards
are implemented with varying degrees of rigor. While many reports
do include the now market-standard appendix tables showing
framework alignment, such tables often show only partial
responsiveness.

Although approximately half of the reports included quantitative
disclosure on Scope 1 and 2 GHG emissions, less than a quarter
referenced the Task Force on Climate-Related Financial Disclosures
(TCFD) framework and provided responsive disclosure on climate
governance, risk and strategy. TCFD disclosure is increasingly
favored by institutional investors, though it is less relevant for
life sciences issuers for whom climate strategy and risk are less
central to business. With qualitative TCFD disclosure forming the
basis of much of the SEC’s proposed climate rule, however, we
expect this to be an area where industry companies increase
disclosure. Other frameworks referenced include the SASB, United
Nations Sustainable Development Goals (UN SDGs), Global Reporting
Initiative (GRI) and United Nations Global Compact (UNGC).

SASB alignment

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The SASB standards are the clear industry favorite. Unlike other
more broadly applicable frameworks that feature many environmental
and social topics less relevant to life sciences companies, the
SASB standards are specific to the industry. The SASB biotechnology
and pharmaceuticals standards are primarily focused on product
development safety and ethics, as well as product safety and
availability.

Product and research disclosure

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Reflecting the SASB standards and industry ESG ratings
methodologies, life sciences reports are heavily focused on product
development topics, including supply chain, testing and access to
medicines. Nonetheless, disclosure topics vary widely, and there is
often incomplete alignment with the SASB industry disclosure topics
and accounting metrics.

Highly detailed or quantitative product and research
disclosure

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In addition to the wide variance in product disclosure topics,
there is no clear convergence on topic quantification, with no
quantified or otherwise highly detailed topic appearing in more
than 30% of reports. Even among mature company reports, the most
common quantified topics –product accessibility (i.e.,
geographic availability) and responsible sourcing (i.e., ethical
supplier standards or sustainable supply chains) – only
appeared in 34% of reports.

Product social impact disclosure

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While detailed or quantitative reporting topics vary widely, it
is increasingly common for life sciences reports to focus heavily
on the inherent “ESG-positive” quality of their products,
with many reports dedicating multiple pages to highlighting the
social impact of their approved products and treatment gaps
targeted by ongoing research.

Human capital disclosure

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Corporate governance and human capital are more highly weighted
for life sciences companies in most ESG ratings due to the limited
relevance of environmental, supply chain, labor standards,
political controversy and other headline topics. In addition,
relatively limited financial expense is required to include
governance disclosure and basic employee demographic data in ESG
reports, particularly if such information is already included in
more limited form in annual proxy statements. As a result, such
disclosure is often one of the more cost-effective means of
improving ESG ratings.

While quantitative human capital disclosure is a near-universal
practice, a much smaller percentage of reports include Equal
Opportunity Commission EEO-1 workforce data. Such disclosure in ESG
reports or proxy statements is likely to rise in light of increased
institutional investor pressure. Although still relatively rare,
descriptions of company initiatives specifically focused on
diversity in scientific and technical roles is a notable,
industry-specific human capital trend.

Governance disclosure

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Corporate governance disclosure in life sciences reports covers
a wide range of topics, with substantive disclosure most frequently
covering anti-corruption and competition practices, ESG oversight,
and risk management processes. Among the more quantifiable
governance topics, detailed stakeholder engagement disclosure
remains relatively rare.

Data privacy and cybersecurity disclosure

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Due to the sensitivities of trial data and trial participant
privacy, data privacy and cybersecurity are heavily weighted topics
in industry ESG ratings. Nonetheless, quantitative data privacy
disclosure, such as incident figures, is much rarer (seen in only
11% of reports).

With ongoing changes to investor and proxy advisor expectations and
policies, ESG ratings methodologies, and regulatory disclosure
requirements, we are likely to see sustained growth in life
sciences ESG reporting, including increased quantification,
reporting standards alignment, and earlier-stage company
disclosure. Cooley’s ESG team is continuing to track industry
disclosure trends and practices, particularly during the upcoming
proxy season. If you have any questions, please contact a member of
Cooley’s life sciences or ESG teams.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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