Although improving, the pharma sector still has social and environmental challenges to address. Nina Röhrbein reports

Drugs can relieve pain, and save and prolong lives. By this measure, most people would probably credit the pharmaceutical companies with enhancing lives.

But after decades of scandal, the sector is anything but snow-white. Apart from a few ethical investors, most investors, including those investing in line with environmental, social and governance (ESG) criteria, still invest in pharmaceuticals. The rapidly changing pharmaceutical sector is interesting for ESG investors, not only for the yields but also for sustainability management.

However, Munich-based ratings agency Oekom Research’s analysis of 76 listed and/or bond-issuing pharmaceutical and biotechnology companies, according to environmental and social criteria, found little movement in the industry on key sustainability issues. It was the poor rating of many small companies which do not pay any attention to sustainability that resulted in an average mark of D+ for the sector on a scale of A+, the highest, to D- the lowest.

“Bigger brand names have a tendency to spend more time and effort on dealing with ESG issues, due to their greater resources and the higher frequency with which they are the subject to investor and NGO engagement,” says Sarah Williams, engagement manager and research analyst at ESG investment research provider EIRIS. “A big driver for corporate responsibility is reputational risk but with pharmaceuticals the consumer often does not know which brand belongs to which pharmaceuticals. In other words, there is a disconnect between companies and their brands.”

Investors mainly engage with pharmaceuticals on social issues, the biggest being access to medicine, as well as bioethics, clinical trials, product liability and health and safety.

Advertising claims of medical success in as yet untested areas of application, the playing down of risks and side effects, payments to doctors and non-transparent lobbying, all have a negative effect on sustainability performance. Self-restraint on the part of companies remains limited to particular regions, and none of the companies analysed by Oekom Research apply strict marketing standards voluntarily worldwide. “Despite stricter standards in marketing and distribution practice, the sector has always found loopholes,” says Marlen Rürup, analyst for the pharmaceutical sector at Oekom Research.

“Another issue which shows large deficits is clinical trials,” Rürup says. The trend of trialling drugs in developing and emerging countries means that participants may not be well-informed and safe. Studies are often carried out on vulnerable people, such as children, the uneducated or those suffering financial hardship who think that taking part will give them access to healthcare.

“Almost one-third of all clinical trials are undertaken in developing countries because it is cheaper and easier to find subject groups there,” says Rürup. “Companies claim they take place according to high ethical standards but they say very little about how they enforce them. Theoretically there are ethical select committees which watch over trials, but if the committee members are not trained or they are inclined towards bribery and corruption, they are of no help. The subject groups in those countries are also more likely to be willing to expose themselves to greater risks and exploitation.”

Corruption and bribery is another issue in the sector. With the US authorities intensifying their investigation of pharmaceuticals, Rürup expects more penalties to occur.

In emerging markets there are interesting growth opportunities for pharmaceuticals, but new business models are needed to improve access to medicines in these countries, says Erik-Jan Stork, senior sustainability specialist at APG Asset Management, founder of the Pharma Futures Project, a collaborative initiative between investors and the pharmaceutical industry. “Some investors might be concerned about risks associated to these new business models so pharma companies will also have to explain to investors how they can generate shareholder value,” he says. “We do not exclude pharmaceuticals on the basis of sustainability criteria. But we did invest more in a pharmaceuticals with a very strong access-to-medicines strategy.”

The traditional approach to improve access to medicine was product donation. However, companies have recently moved into pricing and patents, meaning that they can offer preferential pricing to countries in the developing world, as well as voluntary licences to manufacturers that can offer cheaper, generics products.

Public-private partnerships are used to address the lack of disease research and development (R&D) in developing countries.

Launched in 2008, the Access to Medicine index, a yearly ranking of pharmaceuticals has provided investors with a framework for benchmarking companies in the sector. But Williams says: “There is tension between shareholder maximisation and pressure to make essential drugs available to developing countries. A balance needs to be struck between generating sufficient revenue for business sustainability and continued R&D, and important access-improving initiatives.”

However, due to pricing pressures in the relatively saturated developed markets and increasing purchasing power in developing countries, more companies have moved into emerging markets. “This has contributed to the research of drugs that could become blockbusters there, such as malaria drugs, rather than continuing to dedicate time to, for example, cholesterol reducing drugs in industrialised nations,” says Rürup. “But this is still limited to only a few individual drugs. Expenditure for R&D to fight neglected tropical diseases in those countries is small compared to overall R&D expenditure.”

With the focus on the social side in the sector, other issues take a back seat.  Governance, particularly remuneration linked to sustainable criteria, is one area where pharmaceuticals lag behind, according to Oekom Research.

Swiss asset manager Vontobel has a minimum standards ESG framework in place, which is applied to all companies analysed in the healthcare sector based on the MSCI healthcare universe. The social part is weighted with 50%, governance with 30% and environmental with 20%. On the social side Vontobel focuses on clinical trials, access to medicine, misleading marketing and health and safety; on the environmental side, it looks at the environmental management systems that companies have in place, eco-efficiency such and life-cycle management.

But Rürup says: “Pharma companies do very little with regard to the impacts of drugs on eco-systems despite this being known for decades. In our analysis no pharmaceutical company considers environmental aspects at the first stage of drug development. But with populations becoming older and taking more and more medication, watch this space. The measures taken by a number of firms to destroy active ingredients in waste water through the use of special technologies are generally restricted to isolated sites, and only a small number of companies publish residue limits.”

On the environmental side, progress has been made on water usage, with companies reducing their water consumption or setting reduction targets. The asset manager Robeco has made biodiversity and ecosystem services a priority in its engagement with pharmaceuticals.

It says that 42% of the world’s 25 top-selling drugs are either biologicals, natural products or entities derived from natural products and according to one estimate, at current plant and animal extinction rates the earth is losing one major drug every two years.

“This loss of biodiversity and ecosystem services has implications for all companies and may pose reputational, operational, regulatory, financing and market risks for the pharmaceutical industry, as well as opportunities linked to new drug discovery,” says Erik Breen, senior vice-president, responsible investing, at Robeco.

Robeco commissioned research from KPMG and the Natural Value Initiative in 2010 on the impact and dependency of the sector on biodiversity and ecosystem services, but found that the issue is not being addressed by boards where the focus is on greenhouse emissions.

“We need to raise board-level awareness of the issue, encourage transparency and then come up with the answers which should lead to the mitigation of potential long-term risks,” says Breen. “Three issues were identified by companies relating to the management of biodiversity and ecosystems services dependency; namely water, supply chain risks and natural product drug discovery and competitive advantage.”