Expectations towards the private sector have changed. Corporations recognize they have to deliver financial performance and show positive performance in ESG (Environmental, Social, Governance) matters to establish – and maintain – trust. Not meeting these expectations poses a significant reputational risk.
by Sonja Haut, Barbara Vrede, Denise Weger
Trust relationships are vital to the conduct of business. Trust is based on credibility (what is said) and reliability (what is done). The Edelman Trust Barometer measures trust in institutions and yields insights on alarming trends. In past years, good economic conditions have presaged rising levels of trust. This link still applies in emerging markets in Asia and the Middle East. However, in established markets, major violations of the social contract – corporate malfeasance, government corruption, fake news – have upended this relationship. In the Western world, trust has become uncoupled from GDP growth because people feel they are not getting their fair share of growing prosperity. In 2020, less than one in three people in developed markets believe their families will be better off in five years’ time.
At Novartis, we believe that trust and reputation are tightly linked. One cannot manage trust – as trust is something one is endowed with – but one can manage reputation. In view of the alarming trends in societal trust, it is imperative to consider risks beyond classical frameworks and timeframes when addressing business’ reputational risks. According to the Harvard Business Review, reputational risks come from three factors: (1) Changing expectations, (2) inadequate internal alignment and (3) the gap between reality and reputation. In the following section, we take a closer look at each of the three factors and ways Novartis is addressing each.
Changing expectations. Expectations towards the private sector have changed. In addition to the importance of financial performance, companies are being evaluated by their performance on a variety of environmental, social and governance (ESG) matters, such as sustainable supply chains, labor rights or ethical behavior. While key stakeholders such as customers, regulators, and investors are becoming more socially- and environmentally-conscious, corporations recognize that ESG is the new lens through which companies will be evaluated, and that those that are positively demonstrating their commitment through action, will be able to differentiate themselves going forward.
The changes in social expectations manifest themselves also in changed investor expectations: In the past, ESG ratings were mainly used to avoid investing in harmful sectors (negative screening). In the meantime, more than 80% of buy-side investors actively screen for positive contributions and integrate ESG in their assessments.
In view of these high expectations, risks arise from not living up to them. This leads to the need to focus on all stakeholders and to hear from the sources of expectations – in particular, in volatile and more ambiguous times. The Novartis Materiality Assessment has allowed us to do so since 2006. We seek collaborative approaches of engagement with a long-term perspective to generate insights on changing expectations. Being transparent about our impacts on society and the planet through our Impact Valuation reporting has supported this effort since 2015.
It is important to highlight that ESG expectations are not the same for all industries or companies. While pharmaceutical companies should address environmental sustainability, doing so is even more material for energy companies. At the same time, pharmaceuticals are hold to high standards when it comes to drug safety, innovation, medicines pricing and access – themes that are being surfaced by company-specific materiality assessments.
Inadequate internal alignment. Expectations have risen but still “it takes many good deeds to build a good reputation, and only one bad one to lose it” (Benjamin Franklin). Consistency of actions of all employees is required as they constantly interact with stakeholders such as vendors, customers, society, authorities, and potential future colleagues. At Novartis, we are building a strong corporate culture rooted in moral conduct strongly supported by our new Code of Ethics. An integrated enterprise risk management approach and strong governance mechanisms hand in hand with the oversight by the Board of Directors and a sub-committee of our Executive Committee specifically focusing on ESG themes helps us to ensure alignment in execution. For additional oversight and strategic focus, we are currently establishing an ESG Management Office as part of the Corporate Strategy function.
Gap between reality and reputation. Differences between the reputation and the reality that stakeholders experience carries the risk of disappointing or even alienating them. By surveying both external and internal stakeholders, the Materiality Assessment helps us at Novartis to understand where there are gaps in self-perception and external expectations. Our Impact Valuation efforts have yielded further insights and underlined the internal appreciation of the importance of the “S” component of ESG for Novartis.
To close gaps in reality and reputation, transparency and reporting on ESG matters is becoming more and more important. Supported by the work of ESG research providers such as Sustainalytics or MSCI and new reporting frameworks (developed by organizations such as IIRC or SASB), companies are providing increasing transparency on their actions – allowing for larger comparability across companies and tools for decision-making by investors and beyond (while lot of work on standardization still has to be done). By co-founding the Value Balancing Alliance to standardize Impact Valuation and the issuance of a sustainability-linked bond to achieve our access targets for low- and middle-income countries, Novartis demonstrates its commitment in closing the gap.
In conclusion, managing reputation is about business decisions and concrete actions. Understanding how they impact all stakeholders in areas of their concern and being transparent about it helps elevating «corporate self-awareness», engaging meaningfully with stakeholders and minimizing reputational risk. Companies effectively managing ESG in strategy and operations will strengthen their reputation – and will be endowed with trust by their stakeholders.
Sonja Haut has developed the Financial, Environmental and Social impact valuation approach at Novartis since 2015. In this role, she co-authored case studies on the social impact of living wages, the social impact of pharmaceutical products, on the environmental impacts of global supply chains and on the economic impacts of global supply chains. Working with the Impact Valuation Roundtable companies she co-authored the White Paper on Operationalizing Impact Valuation. Since 2019 she heads the Strategic Measurement and Materiality team.
Barbara Vrede is a Director of Corporate Strategy at Novartis and the Secretary of a ESG-focused sub-committee of the Novartis Executive Committee. In her capacity, she is involved in strategic ESG initiatives across the company. Before joining Novartis, Barbara worked as Engagement Manager at McKinsey & Company, where she advised clients in the Pharmaceuticals and Global Public Health sectors.
Denise Weger joined Novartis in 2012. In Global Health and Corporate Responsibility she leads the company’s Materiality Assessment at corporate and country level. In her role as Senior Manager she supports the Strategic Measurement and Materiality Team in various other strategic initiatives such as Novartis’s Impact Valuation efforts. Denise Weger formally represents Novartis at the Value Balancing Alliance to standardize Impact Valuation internationally. Before joining the Corporate Responsibility (CR) strategy team she worked in CR reporting. Denise holds a Bachelor and a Master of Arts in International Affairs and Governance from the University of St. Gallen.