During the pandemic, pharmacies supported the health and well-being of their communities. They cemented their role as core health service providers. By ensuring access to community health care, they proved their value to governments, other businesses and the public.
The reward for success is always increased expectations. Today, pharmacies’ local initiatives are no longer enough. Key stakeholders — customers, employees, suppliers and investors — have new expectations for what is table stakes across environmental, social and governance (ESG) issues. Retail pharmacies, from independents to national chains, must take a step back, evaluate their business strategy, and think differently about their approach to ESG.
Developing or refining an ESG strategy can create positive societal and environmental benefits. It can also create tangible benefits for pharmacies. With a robust ESG strategy, pharmacies can better retain employees and customers. Pharmacies can increase investor confidence and expand access to capital. Overall, pharmacies can decrease their market risk.
Why is ESG important for pharmacy?
Many industries face increasing pressure from stakeholders to set clear ESG ambitions. Pharmacy is no exception. Pharmacy’s most critical stakeholders are increasing their focus on ESG. For example:
- Customers consider ESG product attributes in their purchasing decisions, especially in the front of the store. Companies that lead in ESG thus create growth opportunities. In a recent survey, Kearney found that ESG leaders with sustainable products could receive a price premium of up to 37%.
- Pharmacy employees are passionate about improving patient outcomes and tackling social issues in their community. In a recent Kearney survey of 2,000 employees, 80% of those working in health care said it was important for them to make an impact on their company’s sustainability footprint across ESG. Pharmacy leaders have the opportunity to engage employees in initiatives that are aligned to their core values.
- Payers/suppliers are increasingly focused on value-based care, and pharmacies have the opportunity to accelerate initiatives that focus on health equity, patient safety and workforce education, which can all contribute to improving patient outcomes.
- Regulators may require more disclosures about ESG impacts. For example, the Securities and Exchange Commission (SEC) has proposed (though not yet passed) more stringent requirements beginning in 2023. They include disclosures accompanying Form 10-K about greenhouse gas (GHG) emissions, climate risks/impacts, targets set and strategic plans to achieve those targets.
Not meeting these stakeholder ESG expectations can significantly increase the costs of doing business. Companies may face difficulty hiring and retaining employees. Customers, payers and suppliers may perceive the brand negatively, ultimately resulting in the brand falling behind competitors that make ESG a strong part of their corporate strategy.
Pharmacy ESG goals especially need more “E”
While pharmacy has historically taken strong action on social topics, we see the industry falling behind on the E in ESG. Industries such as technology and consumer products have made bigger commitments in areas such as carbon emissions reduction and plastic waste reduction.
An example of the lag: Many U.S. pharmacy chains are not validated by the Science Based Targets initiative (SBTi). SBTi ensures that corporate commitments follow the latest climate science to keep global warming well below 2ºC. Another example: Only one U.S. pharmacy chain, CVS, was included on the 2021 climate change A-List from the Carbon Disclosure Project (CDP), which evaluates companies’ disclosures and progress on climate change.
When an entire industry lags, that means there’s plenty of opportunity available. By improving its ESG strategy, a pharmacy could jump ahead of its competitors. There are plenty of examples to follow as other industries have identified best practices, including setting clear, accomplishable targets; increasing transparency in reporting and measurement against these targets; and outlining detailed action plans to operationalize these changes across the organization.
The ESG strategy most critical to pharmacy
Which ESG topics should pharmacies consider? Let’s break them out across categories.
First, pharmacies can set science-based emission reduction targets. They can deploy emission reduction levers such as:
- Improving operational efficiency to reduce energy demand. The good news is that the traditional, efficiency-based approach to operations can also have green benefits.
- Switching to renewable electricity by reducing emissions without incurring capital expenditures.
- Investing in a carbon-offset project, assuming the purported carbon reduction is validated and reducing emissions outside the four walls of the pharmacy.
Second, pharmacies can reduce waste — particularly product and packaging waste. This goal often involves collaborating with partners. Examples include:
- Engaging with suppliers and customers to minimize the volume and impact of expired products. This could include improving inventory management and developing take-back programs to collect and properly dispose of expired products.
- Engaging with manufacturers to support new packaging and product formats, such as biodegradable packaging or reuse/refill models.
Having a strategy to achieve social goals is especially important given the role pharmacies play in the community. Pharmacies can be a unique gateway into the community and can help drive the change that is needed to reduce health disparities. The best ESG strategies tie these social goals strongly to an organization’s corporate purpose and business practices.
One interesting case study is the Senior Care Action Network (SCAN) Health Plan, which saw a medication adherence gap between Black/Latinx members and White/Asian/Other members, according to Managed Healthcare Executive. Through a combination of patient research, employee education, health plan collaboration and, most importantly, tying progress to employee compensation, SCAN reduced the adherence gap from 2.9% to 1.1% within a year.
Health equity challenges can be daunting. But pharmacies need not work alone. They can partner with a community organization or another company to increase and accelerate impact. For example, CVS Health partners with Uber’s health care arm to provide people in underserved communities with free rides to medical care, work or education. Through this, CVS aims to address transportation as a key social determinant of health while improving health outcomes.
Finally, pharmacies can evaluate procurement practices to ensure supplier diversity. Switching to suppliers that have greener business practices or offer sustainable products can help pharmacies achieve climate goals while also achieving social goals, such as working with small or minority-owned businesses.
As the old saying goes, “What gets measured gets done.” To ensure the E and S happen, it is crucial to define key performance indicators (KPIs) to measure and track progress against goals. Setting clear KPIs allows pharmacies to evaluate whether ESG initiatives are creating the impact intended and ensures accountability.
Pharmacies also need to reevaluate their processes and ways of working to ensure decisions are aligned to their overall ESG strategy. For example, how does a pharmacy evaluate new hires? Does the recruitment process ensure talent is reflective of the community? New policies may need to be developed that are better aligned with the stated ESG goals.
What actions do pharmacies need to take?
To build a strategy it is crucial to take a holistic approach to ESG transformation. In the same way that the pandemic helped pharmacies transform into a higher-volume, more-useful part of the community, the climate emergency can help transform the sector again.
How does this play out? Consider the following steps:
(1) Define: Engage with suppliers, employees, payers and customers to understand which elements of ESG are most important to them. Identify the key ESG topics that are important to focus on and determine what initiatives could be implemented to achieve those goals.
(2) Align: Pharmacy has a strong existing connection with the community. How can they further build on that foundation? Which initiatives allow pharmacies to create the greatest impact? What resources are required? Analyze the benefits and costs of each initiative and ensure ESG goals are aligned to core company values.
(3) Operationalize: To “scale up” the impact of ESG initiatives, identify how collaboration is possible with suppliers, payers, providers, peers or community organizations. Seek opportunities to engage pharmacy staff as ESG champions. For large chains, it is important to create a strong action plan that embeds the ESG strategy across the organization and ensure that goals are driven by business functions, not just the corporate sustainability team.
The key to success in ESG, like anything else, is having a strategy. Although much superficial attention is paid to transparency and communication in reporting, these issues should not drive the thinking. Instead, they should be obvious consequences of the ESG transformation.
The next big challenge for the pharmacy industry will be catching up to other industries in ESG.
Dominique Harris is a partner in the Leadership, Change and Organization practice and Erik Blazic is a partner in the Health practice at Kearney, a global strategy and management consulting firm. They can be reached at [email protected] and [email protected]. Laura Bowen is a principal in Kearney’s Health practice, and Emily Rowe is a specialist manager in Kearney’s Sustainability practice; they can be reached at [email protected] and [email protected]. The authors would like to thank Beth Bovis and Brian Ehrig for their valuable contributions.