Industry Spotlight: Pharmaceuticals ESG Ratings Performance

Introduction to ESG in the Pharma Sector

• The pharmaceutical industry is increasingly focused on ESG strategies to improve environmental impact and social considerations.
• ESG reporting is becoming a key factor in the pharma industry, with investors and customers expecting transparency and accountability.
• Pharmaceutical companies are committing to carbon neutrality and reducing their environmental footprint through sustainable operations and supply chain management.
• The pharmaceutical sector is driving ESG initiatives that impact operations, supply chains, and the environment.

ESG Performance and Ratings

• ESG scores and performance are critical for pharmaceutical companies, with social and governance factors playing a significant role in overall ratings.
• ESG practices and reporting are essential for building trust with stakeholders, including investors, customers, and patients.
• Pharmaceutical companies are leveraging technology and data insights to enhance their ESG performance and achieve sustainability targets. Several already use Nossa Data for to help manage their ESG reporting obligations & rating agency engagement.
• Key ratings agencies for the Pharmaceutical industry are generally MSCI, Sustainalytics, and ISS. Most publicly-listed companies with over $USD500million are listed on those indexes.
• ESG Rating Agencies such as the ones listed above are important stakeholders for publicly-listed pharmaceutical companies. Given the variety of pharma companies within the sector, with several sub-sectors (and even sub-sub-sectors) and wide risk variation depending on the jurisdiction, ESG ratings agencies provide a baseline of assumptions and KPIs that investors and customers may use in their portfolio &/or risk and opportunities analyses.
• The Environmental Pillar is a key area of focus for most companies, including pharma companies, with a growing emphasis on reducing energy consumption and waste.
• However, MSCI tends to weight the Social Pillar increasingly highly - often more so than the Environmental Pillar - given extremely relevant social risks and opportunities related to Product Safety and Workforce Conditions.

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How is the pharmaceutical industry performing in ESG ratings?

Nossa Data analysed 285 Health Care companies and their performance on MSCI, Sustainalytics, and ISS. MSCI proved to be the most commonly used index, which indicates that the majority of investors & customers who are benchmarking pharma companies use MSCI as their ESG ratings baseline.

Regional Breakdown

• By far the most companies are headquartered in the USA (43.16%)
• India (9.82%) and Switzerland (6.67%) are the 2nd and 3rd most common countries for Pharma HQs respectively
• Several states only have 1 pharmaceutical company with an MSCI, Sustainalytics, or ISS rating: Belgium, Bermuda, Finland, Hong Kong, Hungary, New Zealand, Saudi Arabia, and Thailand

MSCI

• 87% of pharma companies have an MSCI rating (CCC - AAA, low to high)
• There are 32 MSCI leaders who have an AA or AAA rating, accounting for 12.9% of all MSCI rated companies; MSCI leaders account for 11.2% of all Pharma companies
• Taking into account all Pharma companies, most (58.2%) fall within what MSCI considers "Average" scores: BB, BBB, and A
• 17.5% of all pharma companies have a Laggard score of CCC or B. More pharma companies are lagging in their ESG performance than are leading

Sustainalytics

• 58.2% of pharma companies have a Sustainalytics rating (Severe - Negligible, low to high)
• "Low" = scores between 10.0 and 19.9; "Negligible" is the best = scores 9.9 or below
• Of those companies, 17.5% have what Sustainalytics generally considers good ratings - where there is low risk involved.
• Sustainalytics has a higher % of leaders out of all rated companies than MSCI, however this only accounts for 10.2% of all pharma companies.
• Only 1 company received a Negligible score: Fagron NV (read on for a snapshot of their other ratings)

ISS

• 51.2% of pharma companies have an ISS rating
• "Prime" companies are considered leaders by ISS. I.e. if an industry scores highly a C+ may not be good enough to be a leader, whereas for a lower scoring industry it may be considered Prime.
• In comparing ISS performance with MSCI and Sustainalytics, there are two clear ways of interpreting the data:
  1. ISS likely has lower Leadership thresholds than MSCI or Sustainalytics. This is clear considering less companies are rated by ISS than MSCI or Sustainalytics, and yet account for the highest proportion of Leaders (15% of all pharma companies are ISS leaders, vs. 11.2% for MSCI and 10.2% for Sustainalytics)
  2. ISS likely has higher qualification thresholds than MSCI or Sustainalytics. This is another interpretation which is likely accurate. The majority of ESG Rating Agencies have market capitalization thresholds which companies must surpass in order to be considered, unless otherwise requested by customers of ESG ratings, such as institutional investors.

Snapshot: how aligned are ESG Rating agencies' scoring methodologies for the Pharma industry?

We assessed 20 companies based on their ESG ratings and market capitalization to provide a snapshot assessment of whether or not there is alignment between ESG ratings methodologies. The companies assessed represent roughly USD $2.11 trillion in AUM.

Since these companies are so large, they can fall into a grey area when it comes to industry classifications despite working in Pharma. For instance, Bayer AG's GICS sector is the Chemicals industry by some rating agencies (e.g. MSCI) but as Pharmaceuticals in others (e.g. S&P Global). Similarly for CSL Limited, who is primarily Biotech but effectively a large conglomerate with an arm in pharmaceuticals (and even if it's a 'small' arm for them, they're larger than many multinational enterprise businesses).

Using this as a basis, one can see that Pharma industry alignment on ESG rating agencies is somewhat consistent, but certainly there is some variation between them. If this were not the case, one would expect over 50% of Leaders assessed to be leaders in all 3 ratings. Disparity in classifications between ESG ratings may be a contributing factor.

• Overall, 8 out of the 20 companies assessed were leaders in all 3 ratings. They represent nearly roughly USD $500 billion AUM
• 7 companies were leaders in 2 out of 3 ratings, representing approximately USD $925 billion AUM
• 4 companies were either leaders in 1 or 0 ratings, representing $626.1 billion AUM. Eli Lilly accounts for $561 Billion of that however.

It would be reasonable to conclude that generally pharma companies with larger market caps have better ratings. This is true of a lot of industries, since generally larger companies have better resources to manage their ratings.

However, perhaps with greater size comes greater risk; Novartis is the only pharma company assessed with an AUM over $100 Billion to be a leader in all 3 ratings.

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Aspen Pharmacare (APN)

• HQ Country: South Africa
• GICS Classification: Pharmaceuticals
• Market Cap: USD $2.87 Billion
• ESG Ratings Alignment Status: Semi-aligned (Leader in 2 out of 3 ratings)

Bayer AG (BAYN)

• HQ Country: Germany
• GICS Classification: Chemicals
• Market Cap: USD $30.6 Billion
• ESG Ratings Alignment Status: Disparate (Leader in 1 out of 3 ratings)

Chugai Pharmaceutical Co., Ltd. (4519)

• HQ Country: Japan
• GICS Classification: Pharmaceuticals
• Market Cap: USD $67.8 Billion
• ESG Ratings Alignment Status: Semi-aligned (Leader in 2 out of 3 ratings)

CSL Limited (CSL)

• HQ Country: Australia
• GICS Classification: Biotechnology
• Market Cap: USD $86.3 Billion
• ESG Ratings Alignment Status: Semi-aligned (Leader in 2 out of 3 ratings)

Dsm-Firmenich Ag (DSFIR)

• HQ Country: Switzerland
• GICS Classification: Chemicals
• Market Cap: USD $25.5 Billion
• ESG Ratings Alignment Status: Aligned (Leader in 3 out of 3 ratings)

Eli Lilly and Company (LLY)

• HQ Country: United States
• GICS Classification: Pharmaceuticals
• Market Cap: USD $561.7 Billion
• ESG Ratings Alignment Status: Disparate (Leader in 1 out of 3 ratings)

Gerresheimer AG (GXI)

• HQ Country: Germany
• GICS Classification: Life Sciences Tools & Services
• Market Cap: USD $3.0 Billion
• ESG Ratings Alignment Status: Aligned (Leader in 3 out of 3 ratings)

GlaxoSmithKline (GSK)

• HQ Country: United Kingdom
• GICS Classification: Pharmaceuticals
• Market Cap: USD $77.83 Billion
• ESG Ratings Alignment Status: Aligned (Leader in 3 out of 3 ratings)

Hikma Pharmaceuticals Public Limited Company (HIK)

• HQ Country: United Kingdom
• GICS Classification: Pharmaceuticals
• Market Cap: USD $5.3 Billion
• ESG Ratings Alignment Status: Disparate (Leader in 1 out of 3 ratings)

Kyowa Kirin Co., Ltd. (4151)

• HQ Country: Japan
• GICS Classification: Pharmaceuticals
• Market Cap: USD $9.0 Billion
• ESG Ratings Alignment Status: Aligned (Leader in 3 out of 3 ratings)

Lonza Group AG (LONN)

• HQ Country: Switzerland
• GICS Classification: Life Sciences Tools & Services
• Market Cap: USD $47.0 Billion
• ESG Ratings Alignment Status: Aligned (Leader in 3 out of 3 ratings)

Merck & Co., Inc. (MRK)

• HQ Country: USA
• GICS Classification: Pharmaceuticals
• Market Cap: USD $206.6 Billion
• ESG Ratings Alignment Status: Semi-aligned (Leader in 2 out of 3 ratings)

Novartis (NOVN)

• HQ Country: Switzerland
• GICS Classification: Pharmaceuticals
• Market Cap: USD $257.1 Billion
• ESG Ratings Alignment Status: Aligned (Leader in 3 out of 3 ratings)

Novo Nordisk A/S (NOVO B)

• HQ Country: Denmark
• GICS Classification: Pharmaceuticals
• Market Cap: USD $310 Billion
• ESG Ratings Alignment Status: Semi-aligned (Leader in 2 out of 3 ratings)

Pfizer Inc. (PFE)

• HQ Country: USA
• GICS Classification: Pharmaceuticals
• Market Cap: USD $139.8 Billion
• ESG Ratings Alignment Status: Semi-aligned (Leader in 2 out of 3 ratings)

Sanofi SA (SAN)

• HQ Country: France
• GICS Classification: Pharmaceuticals
• Market Cap: USD $112.5 Billion
• ESG Ratings Alignment Status: Semi-aligned (Leader in 2 out of 3 ratings)

Takeda Pharmaceutical Company Limited (4502)

• HQ Country: Japan
• GICS Classification: Pharmaceuticals
• Market Cap: USD $46 Billion
• ESG Ratings Alignment Status: Disparate (Leader in 1 out of 3 ratings)

UCB SA (UCB)

• HQ Country: Belgium
• GICS Classification: Pharmaceuticals
• Market Cap: USD $37.3 Billion
• ESG Ratings Alignment Status: Aligned (Leader in 3 out of 3 ratings)

United Therapeutics Corporation (UTHR)

• HQ Country: USA
• GICS Classification: Biotechnology
• Market Cap: USD $13.8 Billion
• ESG Ratings Alignment Status: Aligned (Not Leader in any)

Veeva Systems, Inc. (VEEV)

• HQ Country: USA
• GICS Classification: Health Care Equipment & Supplies
• Market Cap: USD $38.0 Billion
• ESG Ratings Alignment Status: Aligned (Leader in 3 out of 3 ratings)

Conclusion: ESG strategies & opportunities

MSCI presents the most room for growth within the ESG ratings industry.

All passive ESG ratings attribute a weight to each pillar (Environmental, Social, or Governance). The highest weighted pillars have the most key issues affecting a company's score.

In the case of pharmaceuticals, MSCI holds the Social pillar to be the most impactful on a company's ESG risk and performance.

In the case of active investors, companies should engage with key stakeholders to a) explain where they are being scored lower and why, and b) find out what issues matter the most to them.

Effective prioritisation like the above is key. It's not just about a better ESG rating; it's about using ESG ratings to inform strategic decisions. Leveraging ESG ratings as an important strategic partner benefits engaging with investors and assessing gaps within your sustainability strategies & performance. For deeper insight into running ESG assessments, read our blog on ESG assessment steps & prioritisation.

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