The U.S. and the European Union are strengthening their calls for businesses to conduct ESG management. As a result, Korean biopharmaceutical companies are also moving briskly in keeping with the rapid changes in overseas market trends.

ESG is composed of environment, social, and governance and is designed to include financial indicators, sales, and non-financial factors in evaluating corporate values and management activities.

Calls have been mounting for ESG management in the U.S. and Europe over the past few years. In particular, the need to introduce ESG management came more urgently for companies that have entered the European market. In February, the EU Commission unveiled a draft of the “Corporate Sustainability Due Diligence Act.” It contains the commission’s plan to inspect the supply chains of EU member countries sequentially from 2023.

Early this year, KDB’s Future Strategy Research Institute issued a report, “Korean biopharma companies’ response to ESG and policy implications.” The report said, “Competition among pharmaceutical companies is in full swing due to the expiration of patents for blockbuster new drugs, and Korean biopharma companies need to secure competitiveness in the global market through rapid responses to ESG.”

In the case of Korean companies focusing on the contract manufacturing organization (CMO) business of raw materials and finished drugs, delays in ESG response could affect their future order receipts, the report pointed out.

The atmosphere of reinforcing ESG management in businesses is the same in Korea. The Korea Exchange plans to make ESG information disclosure mandatory from 2025. Starting with KOSPI-listed companies with assets of 2 trillion won ($1.39 billion) or more, it will be applied sequentially to all KOSPI-listed companies by 2030.

The pressure from home and abroad explains why some companies are often cited as the early targets of ESG management, such as Celltrion and Samsung Bioepis operating in Europe and Samsung Biologics and SK Bioscience as the flagship units of major conglomerates.

Despite such importance, the Korean biopharma industry’s ESG management still falls far short of expectations, experts point out.

"The domestic research regarding ESG and trade and the Korean bio-health businesses’ preparations and responses remain insufficient,” the Korea Health Industry Development Institute said in a recent report on ESG management by Korean bio-health export firms.

The institute’s report forecast that the domestic biopharma companies will be affected much by the E (environment)-area evaluation. That’s because the contaminants and wastewater generated in the manufacturing process, the use of unrecyclable materials for packaging and containers, and the issue of material sources will likely affect the export, according to the report.

“As (medical products) affect the health, directly and indirectly, the environmental standards can be applied more strictly,” the report said.

In the case of Korean biopharma companies, most of them may be prepared for the S (social) area, such as compliance, ethical management, and corporate social responsibility (CSR), due to the domestic compliance rules and the introduction of dual punishment for illegal rebates, but are vulnerable from the aspect of the E, it noted, adding that such vulnerability explains why the Korean companies are obtaining international certifications, such as ISO 14001 and ISO0001 related to environmental and energy management system.

The report also cited the lack of response to the ESG evaluation and certification system recognized by the global market as the task to be tackled by Korean companies in the future.

In 2020, the Rate the Raters Report, which assessed sustainable rating agencies, picked the MSCI ESG evaluation index, CDP (Carbon Disclosure Project), and DJSI (Dow Jones Sustainability Indices) as the highly creditworthy indicators selected by investors and experts.

If companies are included in each index or receive high grades, it will have a favorable influence on their overseas credit standing and attract investment by international institutional investors seeking socially responsible investment,

However, among the 41 Korean biopharma companies subject to DJSI’s evaluation last year, Samsung Biologics was the only company included in the DJSI index. Some, including Celltrion and Yuhan Corp., which were also on the list of evaluation, are not responding.

Participation in CDP is also sluggish. For example, out of 26 Korean companies listed on the CDP’s climate change evaluation in the health and pharmaceutical sector, only Samsung Biologics disclosed its carbon emission and water use.

In the case of the MSCI ESG evaluation index, Morgan Stanley Capital International, a U.S. investment bank, assesses ESG accomplishment by reflecting on sustainable corporate management and business reports. Still, only a few Korean companies, including SK Biopharm, have set the goal of winning good grades from it.

ESG management will emerge as a core value directly linked to corporate survival and growth, and a core social indicator to prepare for sustainable management,” KoreaBio, an industry group, said in a recent report.

To establish genuine ESG management, the report added that companies should not stop at simple PR activities but focus on strategically important activities in the overall management system, including corporate visions, goals, and strategies.