ESG for Biotech and Life-science VC — a first fit-for-purpose framework

At VentureESG, our mission is to educate Venture Capital funds on ESG issues most pertinent to both them and the startups they invest in, and to provide them with fit-for-purpose tools and resources to be able to effectively integrate ESG into their fund operations and end-to-end investment process.

To this end, we, alongside industry partners and research institutions, are carrying out a series of research projects into specific sectors and sub-issue areas — this latest one, in partnership with Pictet Alternative Advisors and Pediatrics Capital, is on ESG for Biotech and Life-sciences VCs. The post has been co-authored by Rob Quinlan, senior medicinal chemist at the Francis Crick Institute and Biotech and Life-sciences Research Fellow at VentureESG.

ESG philosophy captures the “key dimensions of wider sustainability; that is, how people, planet, prosperity and purpose come together to meet the needs of the present without compromising the needs of the future” (FCA, 2021). There is perhaps no greater example of this question than biotech and the life sciences — how can we ensure sustainability without curtailing the ability of companies to make discoveries that will ensure the future health of the population? Indeed, many might argue that this need, and the inherent “good” of biotech practice, leaves it immune to ESG requirements.

As a result, although the number of companies disclosing ESG information is rising, those companies are arguably falling short on their disclosures. A 2022 study found that of 50 biotech companies surveyed, 26 provided an ESG disclosure in their proxy statements and just eight companies provided an ESG disclosure in standalone reports. Of those that did report on ESG, over 60% didn’t reference a biotech-specific material issue as defined by current standards. 34% referenced their clinical trial processes, and 24% included disclosure of drug access policies. Only 14% discussed their relationship with suppliers and vendors.

A significant majority of companies are only providing proxy statements with no qualitative or quantitative data, and the information disclosed largely ignores many of the material topics defined by SASB standards on the pharmaceutical industry. Why is this happening? It is perhaps driven by the lack of a means to identify which issues are material, i.e., relevant for biotech and life science companies and the availability of a fit-for-purpose framework to begin with.

Developing the VentureESG Biotech Framework

In developing a biotech-specific ‘Universe of ESG Issues’, in partnership with Pictet Alternative Advisors and Pediatrics Capital, we hope to address these concerns and to explicitly equip VCs to drive the change in behaviour desired of the industry. We focused on developing a framework that could become a standard part of due diligence, portfolio support, and internal fund management.

Its development was initially approached in a “materiality-blind” manner; we wanted to define what is important for biotech investors specifically but not be biased by current standards. To do this, we conducted interviews with over a dozen funds and LPs to discuss what the key material issues were for them, building the basis of the framework following these discussions.

Peer company benchmarking allowed us to address another key problem with current biotech ESG disclosures — what does good performance look like? ESG reporting from funds and biopharma companies that are consistently highly ranked across various ESG indexes provided an excellent reference point for us to begin to define best practice for our material issues, as well as reports from external bodies, such as the Access to Medicines Index.

Finally, we turned to the current standards, for example SASB and the Biopharma Investor ESG Communications Initiative, in order to compare their suggested disclosures with our emerging framework.

Our Nine Biotech-specific Material Issues

1. Third-party considerations: Evaluating how companies audit and risk-assess third parties (e.g., CROs, CMOs), recognising that associated third-party performance is relevant to a company’s ESG performance.
2. In-house practice: Assessment of in-house manufacturing practices that aren’t outsourced to third-parties, for example waste management strategies and assessment of pharmaceuticals in the environment.
3. Responsible R&D: Evaluating how companies assess the risk associated with their R&D practices. These are broadly unintended environmental and social consequences, e.g., impacts on biodiversity, malicious use of technology.
4. Animal Testing: Ensuring companies adhere to legislation on animal testing, as well as attempting to replace, reduce, and refine in line with guidance from the National Centre for the 3Rs.
5. Patient data: Assessment of its use, along with the privacy and security practices of companies surrounding it.
6. Clinical trials: Evaluation of clinical trial design, integrity, reporting, and follow-up.
7. Access to medicines: Assessment of the company’s commercial strategy with respect to access to their product. This includes things pricing strategies, product registration, and IP management.
8. Product safety: Evaluating companies’ pharmacovigilance and product safety approaches.
9. Success Impact Factor: As many late-stage companies, along with funds and LPs, define the impact of their operations as a material social issue, a “Success Impact Factor” has been included as a means of evaluating how a company approaches its research, for example tackling neglected diseases or areas of unmet need.

Using the Framework

The current framework. Each material issue has a set of questions, the stage of company maturity for which the question is relevant, an example of best practice on that issue, a scoring system, the rationale for that score, and the standard from which best practice is taken.

The framework has taken shape in the form of a questionnaire that tackles particular aspects of company practice within each material issue. Each of the nine material issues has its own set of (stage-specific) questions, along with examples of best practice based on the practice of industry leaders that are consistently highly ranked for ESG performance. Alongside this, we have incorporated advice from independent bodies, such as the Access to Medicines Index and the Pharmaceutical Supply Chain Initiative (PSCI).

Looking Ahead

The nine-month project has resulted in a wide-reaching add-on to the standard “Universe of Issues” developed by VentureESG. Where this highlights sector-agnostic ESG issues, the add-on focuses on those specific to biotech and the life sciences. It is intended to be as exhaustive as possible, and as such can be curated by the investor to suit their needs with respect to materiality. Alongside each question is an example of what industry ESG leaders are doing on these issues, identifying a set of standards against which to measure performance using a sliding scoring system. This permits an assessment of portfolio performance, importantly allowing funds and LPs alike to track it over time. Thus, it ensures both portfolio companies and funds can be held accountable for ensuring strong and improving ESG performance.

As more members of the VentureESG community make use of it, we hope to see the framework embedded into the day-to-day practice of biotech-focused funds. Following its launch last month, we have begun to form a working group that includes several leading biotech and life science funds. The aim of the group is to foster a collaborative effort to reach an industry-wide consensus around ESG reporting in the sector. From its continued use, we aim to distil from the framework a set of universal key performance indicators. The hope is that companies will then be able to produce a single report suitable for all investors. This will enable more targeted support for areas of concern and also streamline the reporting process for all parties, addressing concerns around “reporting fatigue” and driving sustained, positive change.

This is very much the first iteration of the framework — we’re incredibly excited for it to be used by funds and LPs and we are keen to integrate feedback and updated guidance on an ongoing basis. The methodology used in its creation can hopefully serve as a useful blueprint for the development of frameworks across different sectors. As its use continues, we will hopefully be able to develop case studies to highlight and share best practice from real world examples. Finally, we hope to build a portfolio support tool for funds that maps to this framework.

For more information about VentureESG and how we’re working to support Venture Capital funds with implementing ESG across their fund operations and end-to-end investment process, fill in this form, or drop us an email at hello@ventureesg.com.