Michele Tagliaferri explains how ESG regulations that will soon be enacted in Europe under the EU Green Deal will turn ESG programs from a “nice to have” to a “must have.”
In recent years, the incorporation of ESG into the business cycle and operational decisions of life sciences companies in the EU has become a critical aspect of financial and organizational performance measures. The most recent ESG trends are now urging life sciences companies to expand their historical commitment to health and social issues, and to embrace broad environmental and governance goals. Indeed, the ‘S’ pillar of ESG has historically been a priority for life sciences companies because it aligns with the very mission of the industry: fostering treatment, safety, and access to medicines. The most recent developments in ESG trends are now encouraging life sciences companies toward expanding their historic commitment to health and social issues into ambitious environmental and governance goals.
Aligning their corporate strategy with ESG goals is now a priority for many life sciences companies, particularly considering the financial, regulatory, and reputational impact of the current and forthcoming environmental, social, and governance priorities within the EU. While ESG-focused investments have been constantly on the rise for a few years, the upcoming ESG regulations that will soon be enacted in Europe under the EU Green Deal will turn ESG programs from a “nice to have” into a “must have.”
In 2023 life sciences companies will need to prepare for two EU directives that will introduce new rules on corporate sustainability due diligence and reporting: the Corporate Sustainability Reporting Directive (CSRD), which has just been adopted and will soon enter into force, and the Corporate Sustainability Due Diligence Directive (CSDD) which is expected to be adopted in 2023. The two rules introduced by these two directives will have a significant impact on how companies manage and report on their sustainability efforts in relation to potentially adverse human rights, and environmental effects from both their operations and the operations of their value chain.
The proposed CSRD will require large EU companies, as well as non-EU companies meeting certain thresholds, to comply with detailed sustainability reporting obligations in relation to social factors and environmental matters. In parallel, the proposed CSDD will require both EU and non-EU companies meeting specific thresholds to conduct diligence that can identify, prevent, resolve, mitigate, and account for adverse human rights and environmental effects. These due diligence obligations will apply to companies’ own operations as well as to the operations of their subsidiaries and supply chain. To ensure that the new due diligence requirements are properly implemented and integrated in a company’s corporate strategy, the CSDD will also require company directors to take into account the impact of their company’s activities on human rights, and the environment of as part of their duty to act in the company’s best interest.
The CSRD and the CSDD will need to be transposed into national laws within, respectively, 18 and 24 months from their entry into force. However, several states including Germany, Switzerland, and the UK have already enacted laws mandating supply chain due diligence and transparency in line with the EU directives. Together with the enactment of national laws imposing such requirements across Europe, in 2023 we expect to see a progressive increase in enforcement by national authorities as well as civil litigation for breach of directors’ duties and for damages resulting from the failure to comply with the new obligations. At the same time, we expect EU health insurance funds to start reflecting sustainability considerations in pharmaceutical and medical device supply contracts.