Climate change and environmental reporting: US pharma financial disclosures

Are big pharma companies merely paying lip service to corporate social responsibility around climate change? An investigation into the disclosures made by 25 of the largest suggests there is a long way to go.

Over the past decade, climate change has become a major topic of debate in various arenas. Although the fundamental issues have been disquieting to both environmentalists and social activists concerned with sustainability for some time, the range of interested parties has expanded greatly as a consequence of significant new legislative and government regulation initiatives in the US. The effects of greenhouse gas emissions on the global environment have spilled over into political and financial areas with considerable impact.

In early 2010, the US Securities and Exchange Commission (SEC) issued interpretive reporting guidance regarding disclosures related to climate change. The SEC's pronouncement focused on four main concerns: impacts from existing regulation and legislation; effects generated by international climate change accords; expected indirect consequences of new environmental protection rules, and risk consequences on business activities resulting from the physical effects of climate change.

Disclosures from these four areas will create many questions and uncertainties concerning the materiality of climate change financial risks as they apply to publicly-held businesses.

A crucial element connected with the threat of global warming – the ultimate consequence from greenhouse gas emissions – is the risk that it might add complexity to operating a company and detrimentally affect the firm's financial outcomes. Climate change impinges on economic activity as well as the physical environment. The empirical research effort described here is focused on the quantity and quality of disclosure about environmental factors and climate change risk that a selected group of large pharmaceutical companies made in connection with the new SEC disclosure guidance.

To determine whether firms in this high-profile and strongly profitable sector disclose their internal assessment of climate change risks to stakeholders in annual reports, data were gathered from 2012 and 2013. For SEC registrants, Form 10-K and Form 20-F filings were used; in the case of other non-US companies, annual reports were accessed.

The largest 25 pharmaceutical companies, based on 2013 total revenue, that were included in the study sample were: Abbott Laboratories; AbbVie; Actavis; Allergan; Amgen; Astellas; AstraZeneca (AZ); Biogen Idec; Boehringer Ingelheim; Bristol-Myers Squibb (BMS); Celgene; Eisai; Eli Lilly; Gilead Sciences; GlaxoSmithKline (GSK); Johnson & Johnson (J&J); Merck; Mylan; Novartis; Novo Nordisk; Pfizer; Sanofi; Takeda; Teva and Valeant.

Both the quality and quantity of disclosure regarding environmental impacts and climate change risk were considered through a content analysis approach. In public filings, discussion concerning climate change typically appeared in sections with headings such as 'Environmental Matters' and 'Contingencies and Environmental Liabilities' with emphasis on litigation from actions brought under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), also known as 'Superfund'.

The results indicate that of the 25 companies in this review, only 10 disclosed environment-related capital expenditures and similar costs as part of their 2013 reports. These were: Abbott, AbbVie, Astellas, AZ, BMS, Eisai, GSK, Merck, Pfizer and Sanofi. Within this group, Pfizer reported environment-related expenditures and expenses totalling $161 million. Abbott's expenditure for pollution control totalled nearly $45 million. AbbVie incurred $22 million for pollution control and BMS spent $19 million on projects designed specifically to meet environmental requirements. There is every reason to believe that these environment-related costs were fully intertwined with climate change risk issues.

Additionally, 10 firms in the sample, including seven of those identified above that reported environment-related expenditures, were party to proceedings brought under CERCLA for remediation of contaminated Superfund sites. These included Abbott, AbbVie, BMS, Eli Lilly, GSK, J&J, Merck, Novartis, Pfizer and Sanofi.

All firms stated an involvement with CERCLA in their annual report. BMS disclosed that it was party to investigation and remediation at 16 facilities and had been named a potentially responsible party for clean-up at 23 former waste disposal or reprocessing facilities operated by third parties. Eli Lilly reported that it was a potentially responsible party for remediation at fewer than 10 sites.

GSK disclosed that it had been advised that it may be a responsible party at 23 Superfund sites, 12 of which appeared on the National Priority List created under CERCLA. In 2013, GSK spent $5 million on remediation work, compared with $3.8 million in 2012, and had sole or partial responsibility for 28 remediation sites. J&J was remediating contamination at 18 current or former facilities. In 2013, it spent $5.5 million on these facilities. Merck reported its 2013 expenditure for remediation and environmental liabilities was $20 million, compared to $14 million spent in 2012.

The results of this research contribute to the assessment of pharmaceutical industry firms in a practical way. Financial markets impound decision-relevant disclosures in an efficient manner. Climate change risk assessments provided by management in publicly-available disclosures like Form 10-K assist investors in making economically rational buy-sell-hold decisions.

Pharma companies often cite the merits of being in harmony with the environment as part of their corporate social responsibility (CSR) efforts – a point consistently emphasised in their annual reports. Given the requirement to pay large fines for environmental transgressions and the significant revenue and net income of these firms, the commitment to prospective adherence to the SEC's guidance regarding disclosures related to climate change is a matter of some concern.

Our study failed to find that even a majority of the firms reviewed made disclosures compatible with the SEC guidance. Public policy makers, too, need these data as they continue to formulate market-based incentives to control greenhouse gases and other deleterious environmental effects of pharmaceutical manufacturing operations. Without reporting beyond a mere recognition of CSR, it is unlikely that this essential decision making will proceed towards an outcome that will benefit all those impacted by climate change.

About the authors:

A J Stagliano, PhD

A J Stagliano is Professor of Accounting in the Erivan K Haub School of Business at Saint Joseph's University in Philadelphia. The initial (1985-95) holder of the Edward G Sutula chair in Accounting, he holds degrees from the Wharton School (BS), University of Michigan (MBA), and the University of Illinois (PhD). The former chairman of the Department of Accounting and Legal Studies at George Mason University in Fairfax, VA, Dr. Stagliano previously served on the faculty at the University of Maryland.

His current research is focused on corporate financial disclosures of cyber-risk threats, sustainability efforts, social responsibility/accountability and environmental costs/liabilities. His more than 125 articles have appeared in a wide array of academic journals over the past 40 years.

Dr George P Sillup

Dr Sillup is the chairman of Pharmaceutical & Healthcare Marketing and Fellow in the Pedro Arrupe Center for business Ethics at Saint Joseph's University, following 28 years of work in the diagnostic, pharmaceutical and medical device industry, where he held positions from salesman to COO. During his industry tenure, Dr Sillup has attained favourable reimbursement coverage and coding to support product launches in the US and global markets and monitoring how implementation of healthcare reform will impact healthcare delivery in the US.

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