Novartis AG (NOVN) Earnings Call Transcript & Summary

So good afternoon and good morning. A very warm welcome here to the Novartis lecture on integrating ESG into strategy. It gives me great pleasure to introduce my 2 guests for today. First of all, let me introduce you to Professor George Serafeim. Professor Serafeim is the Charles M. Williams Professor of Business Administration and the faculty chair of the Impact-Weighted Accounts at Harvard Business School. He has presented his research in over 60 countries around the world, including to world leaders and events such as the World Economic Forum. He ranks among the top 10 most popular authors out of over 12,000 business authors on the Social Science Research Network. And he is currently teaching the course "Risks, Opportunities and Investments in an Era of Climate Change" that he designed for the elective curriculum in the MBA program at Harvard. Welcome, George. And to my second guest, Dr. Lutz Hegemann. Dr. Hegemann is the Group Head of Corporate Affairs and Global Health at Novartis. Lutz started his career as a public health physician and scientist, and currently is responsible for driving the corporate strategy of Novartis and integrating ESG into the core of our business strategy. Lutz is a fellow of the Royal Society for Tropical Medicine and Hygiene, and he also sits on the Boards of the Novartis Foundation, the Swiss Alliance Against Neglected Tropical Diseases and the Tanzania Training Centre of International Health, and PATH. So we have a great agenda for you today. We're going to hear from Professor Serafeim, so thank you for that. We're then going to have a panel discussion before we open it up to you, the audience. And for that, we would encourage you to submit your questions on Pigeonhole. I think you have the link visible to you, and we will get to as many of those questions as possible and you can vote on your questions also. So with that, please can I hand over to you, Professor Serafeim.

Katrina, thank you so much. And it's a great pleasure to be with you all today. I hope we're able to be in person, but sometime in the future; for now, we'll use some virtual technology. I'm looking forward very, very much to hear any comments, questions and the discussion in general. And before that, I would like to share a few thoughts with you about some of the work that we have been doing over the last 10, 15 years in the general area of mobility and environmental and social governance issues and trying to understand a couple of important questions. First, what is it that drives the interest in ESG more and more within the business community? And the second one is what works? Because one of the things that we have found that we understand now is that not everything that organizations are doing actually is delivering either value or impact over time. So I want to touch on this idea and really try to understand what works. Before we get there, I want to flesh out a few ideas about why is it that everybody is talking about ESG these days? So if we go to the next slide, one of the things that we understand is that there are a couple of trends that are at play here. The first 1 that I think is really, really important is that values are shifting and are changing over time. I say that in the classroom as well with more and more students are actually asking the question about what is the impact that business is having on society, how can we align our choices as consumers, as employees, as investors with a more positive impact. The second idea is data. With the advancement of technologies, we can actually measure many more things and really understand the impact that business is having on society. And with that advancement of data, we can actually integrate that into our discussions, into our choices as consumers, as employees as investors. And then businesses as well in terms of managing their own activities. So data is the second big mega trend. And the third one is that because of the change in values, but also in our ability to measure, capture and disseminate data: This has allowed us to uncover and understand that all these data are actually value-relevant. In some cases, they allow us to understand risks, opportunities, capital optimization and really how can we allocate scarce resources inside organizations. And of course, with the advancement and the connection to value, this has allowed more and more investors to connect environmental, social and governance data to capital allocation and investment allocation decisions. And as you can see, this is a feedback loop. Meaning that the more values are shifting, the more we can actually understand the data, the more we can connect them to value and the more we can actually influence capital allocation decisions. And the more this is happening, the more we are actually shifting more towards an impact economy, whereas a business, you need to be able to, one, measure, analyze, drive and communicate performance on dimensions of environmental and social impact. And of course, at the core of this, also, if we click once more, we see that there is a shifting set of institutions and policies that are created both from governments and regulatory agencies, but I would say also from civil society about what is to be expected organizations around the world when it comes to issues of climate change, of diversity and inclusion, of customer impact, of access and affordability to products and so forth. So if we go to the next slide, I think one of the really important dimensions that has happened with these feedback loops between data, values, value and capital is that we're observing over time now that firms with superior ESG performance on material dimensions, meaning on strategically important dimensions given the industrial context and the geographic context that different organizations are operating, are starting now to trade at valuation multiples that are higher compared to their competitors that are not having strong ESG performance. And as you can see, this was not always the case. Going back even 10, 15 years ago, actually, those organizations were trading at a discount relative to their competitors. And this is something that we have found also in separate studies going back 10 years ago, where we were looking at those organizations that actually were observing that investors were looking at them as ways of wasting shareholder resources, not as building fundamental strengths in the organization. I think a fundamental change that has happened is that investors more and more are looking at many of those activities as creating intangible assets inside the organization. So not as a way of wasting resources by investing in terms of improving environmental and social dimensions of performance, but actually as creating intangible assets through which you are expecting future economic benefits in the form of human capital, social capital, intellectual capital and so forth. And I think that is also a very, very important development. Now when we take a step back, one of the things that we have uncovered in research is that organizations go through a journey. Most organizations view ESG activities initially from a compliance perspective, meaning, "How can I manage risk? How I can make sure that we do nothing that is gravely wrong?" Over time, as those activities are maturing, organizations are shifting, and they view their sustainability and ESG efforts as an efficiency exercise, meaning, over time, they're actually uncovering opportunities for cost savings and for improving productivity inside organizations. So they are trying to increase efficiency. But I think where most of the value around ESG activities is coming is when you move to the third stage. And there are few organizations that have moved there and actually are viewing those activities as an engine for innovation and growth. Meaning how can we embed that, how can we mobilize the core competitive advantages and the core capabilities of an organization to actually provide products and services that meet unmet market demands and create new markets and new products that are actually fueling innovation and growth and positive impact at the same time. Now as you're going from -- through that journey from compliance to efficiency to innovation and growth, the key always is in the strategy implementation and of course, connecting ESG to strategy. So not all organizations we have found have been able to follow through that journey, and there are a couple of things that we have found to be quite important in order to reach that stage of innovation and growth. If we go to the next slide, I want to start outlining some of those pieces. The first 1 is that it needs to be that ESG is viewed as a strategy, instead of viewing it as a program. And a fundamental mistake that I have found many organizations making in this space is actually viewing ESG as a reporting exercise instead of a strategy exercise, and actually allowing reporting to drive strategy. While it should be exactly the other way around, meaning that strategy should be driving reporting. So not starting with a set of guidelines or standards and so forth and trying to comply with them, because that is leading you into a compliance mentality inside organizations, but actually taking a step back and understanding what is our unique competitive positioning in the marketplace? What are your unique and core capabilities? And how can we mobilize those to create actually less negative and even positive environmental impact, more positive employment impact and more positive impact on the customers through our products and services that we're offering. And 1 of the things that we have found over time happening in this space is that actually most organizations are not viewing it as a strategy, but actually are viewing it as a set of programs and activities that are quite easy to imitate. And this is what this graph is showing you that as more and more organizations are viewing those efforts as a set of initiatives or programs rather than a strategy, they're starting to imitate each other, and as a result, creating this more cluster, I would say, sense of distribution because now more and more organizations within industries are looking very, very identical, I would say, from an ESG perspective because they're not viewing it from a strategy perspective. Now what are the performance implications from that? If we go 1 more click and one of the things that I want to show you is that, actually, the organizations that are able to differentiate themselves from the competitors actually connected to their strategy into their unique competitive positioning and drive performance on those dimensions, are actually the ones that are able to improve their performance through those efforts. So 1 of the things I want to show you here is that what I call leaders in terms of differentiation, not in terms of adopting a set of common practices around ESG, are the ones that we see actually in the future, looking at improvements in return on capital, return on sales and operating efficiency as well in terms of asset turnover. So if we go to the next slide, 1 of the things that I want to emphasize around this idea is that ESG and actually improving performance on ESG dimensions is not something about just doing more on just everything. What actually leading organizations, what they're finding is that you need to be strategic about understanding what are your core capabilities and where you can add most value. So for example, if you're running a financial institution, it's actually through your lending and underwriting practices and really about pricing of risk that you can actually add more value when we're looking at climate change. If you're actually an industrial company, it's through actually decarbonizing through your products and services, much more of the energy and transportation sector, and so forth. And if you are looking at a healthcare company, it's about actually the quality and the access and affordability of the products and services that you're providing and how these are impacting the customers from a health perspective. So actually being focused, but at the same time, understanding how you are actually competing and how you are different from competition and leveraging that in order to actually improve your positive impact is where we're finding leaders. When we're finding organizations that might be focused -- but at the same time, they are concentrating on a set of practices that are just becoming table stakes for the industry, this means that those organizations are trying to catch up. And of course, that is important. That is not to be neglected, but this is not actually how we lead to innovation and growth. And of course, organizations are trying to do everything and concentrating more on the common practices, are organizations that are just trying to imitate. And of course, if you're trying to do everything and just try to concentrate on the unique practices, this is where organizations mostly fail because actually, they are not strategic and they are not focused on the key elements that are able to make them -- and allow them to make progress. Now if we go to the next slide, the second element that I wanted to touch on is how can you actually implement that inside organizations? And I think their culture is a very, very important perspective because culture is one of those things about what can we do? What are the norms, beliefs and values inside the organizations and how employees behave without necessarily being monitored about behaving that way or without necessarily having exclusive incentives to do that? And I think that's where the discussion around purpose-driven organizations becomes really, really important because organizations with a strong sense of purpose, they have a very strong sense of alignment and a shared set of beliefs about what is it that organizations need to be making. In our research around purpose, one of the things that we have found is that it's not only about those beliefs of purpose inside the organization, but it's also about the clarity around that purpose that is being provided by senior management throughout the whole organization. In general, we have found this pattern where actually if you go to middle management and further down in the hierarchy of the organization, those beliefs around purpose among employees decline over time. And if we click 1 more, what I want to show you is that actually, it's not just purpose within the senior management that is actually allowing organizations to drive performance forward. But it's really the diffusion of that sense of purpose throughout the organization that is driving performance -- if we do 1 more click. And this is where we're observing that positive relationship between basically presence in the workforce of beliefs that we are doing very, very meaningful work. And also we have clarity, and we have clear management expectations and tools and resources to pursue that purpose and the future improvements in operating performance inside the organization. So culture is an important perspective for implementing actually the strategy. But if we go to the next slide, the other very important perspective is actually systems and management tools that allow you to implement. This is a graph from one of the Harvard Business School cases that I pitch in as part of my course as well. And I think it's really, really important to actually put that in a matrix context where we actually have -- you can think about the Y-axis here as basically risks that are arising from -- in this case, for example, is from an environmental perspective. But also on the X-axis as well looking at that from the perspective of opportunities. This is a management tool, for example, that an advanced materials European company developed to really understand the life cycle environmental impact and environmental cost to produce a product and a product application. And then on the X-axis, how well it is aligned with actually future sustainability regulations and expectations among customers. And what you can see here is obviously the product applications that are going to be on the far right, upper hand corner, these are the ones that have both lower risk, but also higher opportunity potentially. And the ones that are graphed with a red line is what we call challenged products, because the risk to opportunity ratio is pretty, pretty high. If we click 1 more, 1 of the things that you see is that actually the same product can have different market feeds and different market applications. So it's really, really important not to think about products necessarily as just good or bad, but it's actually how the product might be applied. For example, you can use, let's say, soda ash to create a double glazed window that actually saves a tremendous amount of carbon by insulating buildings for the customers. But you can also use the same kind of soda ash product for creating a beer of -- a bottle beer. So that has very, very different actually environmental implications. And it's the same thing when we're thinking about from a social perspective as well. Now in the next slide, what I want to show you is that once you start developing those tools, you also start understanding how you can actually allocate resources inside the organization and what can drive performance. And of course, for example, what this company has found is that what they call actually solutions products have been actually experiencing improvement and increases in revenue growth, while the challenged products have been declining in terms of revenue growth and the difference is about 4% positive growth versus minus 5% negative growth. So what I want to summarize with this is that as we are thinking about strategy implementation, both the culture and creating purpose-driven organizations is important. But also what is important is actually developing new management tools that allow you to allocate resources in an objective and a data-driven way. And both of them together allow for something really, really important inside organizations to happen, which if we go to the next slide, we can see which is decentralization. ESG cannot be something that is a separate department inside an organization. It needs to be embedded inside the organization in terms of what everybody is doing. And for me, this is really, really important because many people feel that organizations might be saying that a purpose-driven organization might be having an ESG strategy. But most people inside the organization, they don't feel that they have agency to actually influence the outcomes. And I think that decentralization process becomes really, really important. One great example here is actually an organization that I started a few years ago that adopted science-based climate targets. And one of the most important things that happened as part of this process inside the organization was that people that have never really communicated before, started communicating in the context of sustainability. For example, people from real estate -- because it was a retailer and the company owned a lot of real estate -- but also people from finance came together and procurement and strategy to really understand how can the organization achieve that science-based target moving forward. And as a result, it wasn't just that the centralized sustainability department had all the decision rights, but they started allocating those decision rights, the different business units and to the different functions. And as a result, people owned all of those objectives, and they felt that they had the agency to drive them forward. So as the culture, but also the systems allow an organization to decentralize that strategy and as a result, to become truly integrated inside the organization and not to rest at the periphery. If we go to the next slide. And as we are moving from decentralization, a really important last topic that I want to touch on is on this idea that as this is happening, an organization is starting to measure actually effectiveness of the efforts that are being measured really by tracking outcomes, impacts and then ultimately, the value of those impacts. Because a fundamental disconnect that has happened in this space is that most of the organizations are measuring and reporting on, really, inputs or at most outputs in the ESG domain. Meaning, for example, what are the policies, the processes, the principles, the disclosures that we're making, which are all -- and the targets and so forth, which are all inputs into a process instead of really trying to track the outcomes of those activities. So it's not actually we have, for example, a diversity policy and diversity target and so forth. But actually, are we becoming more inclusive as an organization? Are we observing that, for example, people -- racial minorities and women are able to get promoted inside the organization, not only get hired, but get promoted and grow inside the organization and so forth. So as we are moving along this spectrum, I think organizations are getting a very, very important lens into not only whether there are intentions to achieve something, but actually whether they are effective in achieving something. And I think this is a critical, critical component of a coherent strategy. On the next slide, I wanted to wrap up with this, which is as you're measuring effectiveness, 1 of the things that we're observing is that again, consistent with the previous and the first graph that I showed you, we're actually observing that leaders relative to laggards are now enjoying, again, valuation premiums. So those are not as signs of intentions, but actually proofs of outcome are now being embedded in corporate valuations. Again, here, I'm showing you just from a simple environmental intensity perspective that we have been able to measure the environmental impact in monetary terms that organizations have been making. And you're looking at a couple of industries with very, very large environmental impacts, we're observing that laggards relative to leaders are trading at much lower valuation multiples in markets as investors are understanding that these are significant financial risks that are being imposed by those negative environmental impacts. So last slide, in the next slide, I just want to bring everything together before we go into our discussion and say that there are a couple of really, really important elements. I think if you view your impact that you're having on the environment, and on your employees, on your local communities and, critically, on your customers through your products and services as a compliance exercise, this is unlikely to be something that is scalable and sustainable inside organizations and something that is going to make a real impact. The key is to connect it to strategy. And in order for this to happen, there are a couple of really critical elements. The first 1 is that the accountability mechanisms inside the organization need to be built that make this institutionalized and something that is sustainable inside organizations truly in the sense of actually durability. So it's something that is not actually just dropped when there is a recession or when the organization is going through a hard time. But because it's creating value, it's something that is actually mission critical for the organization. And those accountability mechanisms need to be both top down from a governance perspective and from a leadership perspective and from a tone at the top perspective, but also they need to be bottom up because they need to be embedded in a culture that is truly about what is the purpose, what are we trying to do as a business here. And then as we are thinking about strategy, we need to think about what are the core competitive assets that our organization is having. And as a result, how those can be mobilized to create more positive impact and mitigate the negative impact. And the fourth element then, that needs to be diffused throughout the organization in order for everybody inside the organization to be able to understand the agency that they have to drive those outcomes forward. Of course, the last piece is what we mentioned around measuring impact and measuring effectiveness and outcomes, and that is very, very critical as also outside stakeholders and shareholders are moving from intentions to understanding outcomes. And that is a very critical piece as well. Thank you very much for your time, and I will give it back to you, Katrina.

Thank you so much, George. Thank you for framing that in such a simple way in terms of how we can think about that ESG element in a few critical elements. I'd like to go a bit deeper into that in our Q&A now and perhaps start with the strategy piece that you ended on there. So how can we, as the ESG community, really help leaders across businesses better understand the importance of integrating ESG into daily operations versus what you said at the beginning, which is kind of keeping it separate as a project. And I think this comes down to the strategic core integration?

Absolutely. And I think this is something that we have made actually a lot of progress. So reflecting back at this, about 10 years ago even, I would say, 5 years ago, there were really few organizations that were thinking about those issues as mission-critical. But I think many, many industries are now realizing that you cannot have really a successful business in a society that is failing. And I think as a result, improving the ecosystem around us by serving the customers better, by having better employment practices and by protecting a very fast degrading environment is really, really mission-critical. And I think the perspective that many people had for a long time was that, okay, let's create value and then let's allocate a small part of that value from a philanthropic perspective. So it was almost like let's do business as usual, and then we'll allocate part of the resources to fix something that shouldn't have been there. But I think it's a very traditional -- a very fundamentally different perspective to ask the question about how can we create value differently. And how we might never get to those negative outcomes? And how can we get to very, very positive outcomes? That requires a very different kind of thinking and really mobilizing the organization in a very innovative and creative way. And what I say is that for this to happen, you really need to unleash the innovative and creative capacity of people inside the organization. Otherwise, you're never going to be able to get at a different way of thinking because fundamentally, it requires you to do something different from what you have already been doing.

Thank you. Very clear. I can see lots of questions coming through on Pigeonhole, but before we move there, perhaps I'll come to you with a question Lutz. So we've had our own evolution at Novartis on our ESG journey. Can you tell us a little bit about that evolution and our core focus areas for our ESG strategy.

Yes. Thanks, Katrina. I think we first need to consider what is the purpose that we have here at Novartis. And as a health care medicines company, I think it's critically important that we realize that the social element is inherent to why we exist. And that's reflected in our purpose and mission statement where we say we are here to innovate in the field of medicines but also we need as many patients as possible to benefit from that innovation. So I think that is a very clear focus, that's core of our business that the reason why this company exists. That is already on the S component of ESG. And I think as George has alluded to, we started on this journey some 20 years ago and initially had like many other companies, a corporate social responsibility office that was planting trees. And we felt that this was the right thing of going about the ESG mandate at the time. But gradually so over the last 20 years, we have moved from a donation model to shared profit model now, and I'm happy to elaborate later on that a bit, finding more and more ways to really integrate environmental, social and governance topics into the core of our business and not having it beside our business. And that, to me, is a very important change that we have been making through the years, learning from what's what really had an impact, what did not have an impact, what was durable or sustainable, what was less sustainable and trying to maximize the impact that as an organization we can have on society at large.

Thank you, Lutz. So let's move to our Pigeonhole. And we will start perhaps with the question with the most votes, so perhaps we can pop that up for us. So ESG is being positioned as cake for all with no calories: good for companies, good for investors, good for society. Can you share your thoughts on any or potential downside cases? So George, perhaps I'll start with you on that piece.

It's such a really, really important question and such a good point. And I always say that basically it's actually truly going to the innovation and growth stage. It's something that actually requires for the organization to take real risk, right? So not all organizations are able to actually make that journey and make something that's successful. And we have seen cases of organizations that are failing to actually be able to realize financial benefits from their investments. So the higher is the investment that you're making, the higher is the risk that you're taking. Of course, the higher can be the positive outcomes, but also the higher can be the negative outcomes. And we have seen organizations, for example, in the environmental space and with climate change that have been able to achieve some pretty remarkable outcomes and have very, very good drivers of financial performance, but also we have seen very negative outcomes. And I think that also puts a risk from an organizational perspective. But also if you think about it from a personal perspective. This is something that I emphasized quite a bit in my forthcoming book around profit and purpose. That actually ESG is not really a free lunch. And if you observe many of the really big success stories, leaders have taken pretty big risks throughout that process. And we also -- we also have seen some really important, I would say, cases of failures where organizations haven't been able to pivot, haven't been able to actually realize financial benefits. And as a result, this has been, I would say, a difficult process for many organizations. The second thing that I want to say around that is that I don't think actually this is what I would say, good for all companies. What do I mean by that? It is a competitive landscape, and some companies will be able to actually benefit from the shift in consumers, for example, to certain types of products, from investor changing capital allocation decisions, from employees and the choices that they make in their workplace. And some other organizations are going to be hurt by that. I just want to mention 1 example just to make that real. For example, when we looked at the announcement of the European Union nonfinancial disclosure regulation back in 2014, 1 of the things that we observed was that actually for companies that had relatively strong ESG performance and good disclosure already, you observed a positive market reaction and positive stock-price reaction. For companies with low levels of disclosure and low ESG performance, actually, investors reacted in a negative way, meaning stock prices actually declined. And this is actually an idea that is a really important idea, which is as we're moving to a world where we are actually caring about and pricing those environmental and social impacts that we're having, not every organization will win. Some organizations will win and some other organizations will lose. This is a competitive landscape. So if you couple those things together, that one, truly integrating ESG into the practices is almost like a change management process and requires some significant investments, and not all organizations will be effective at that. So both leaders, but also organizations are taking risks, real risk and sometimes they won't work. And second is that as the competitive landscape is changing, not all organizations will win, I think it gives us a quite different perspective about ESG as something that is really changing the competitive levers, but not necessarily as a good for everyone.

So perhaps Lutz as an extension of that integration of ESG strategy into the operations, can you expand on that a little bit for us? Where are we really leaning in and focusing from a Novartis perspective?

I mean when I saw the question, I was first thinking you lose the calories very quickly because integrating ESG is hard work, and it makes a complex world potentially even more complex by adding additional dynamics to it. But what guides our principles is the access principles that we had launched a few years ago. And again, coming back to the hard work because it asks our teams now to look through the entire continuum of the value chain from drug discovery to delivery through how we implement programs in the market, to look at the ability to reach as many patients as possible, which I consider a proxy for making the biggest societal impact. And while it's difficult to measure the impact and would be great to hear from you, George, what the sort of latest thinking here is on true impact measurement, we are currently using surrogates for that, and that's around patient reach. And this is the ultimate aim, what we do with our innovations in our core business. But then we also complement this with activities that reach specifically underserved patients, neglected populations, neglected diseases, neglected countries, and as another example, some of you may be aware that in Sub-Saharan Africa, which is home to the largest number of underserved patients, we have recently changed our business approach in that we have said, how can we make the biggest impact and measure that through patient reach and put this metric in a decision framework above all the classical financial metrics. And it's very nice to see that even in a year of a pandemic, with this new mindset, we were able to reach 30% more patients in the first half of this year relative to previous year. And the nice thing is that also financially, we are performing better, which, to me, is a very nice proof of principle that at least in some markets and with some approaches that purpose and profit are not a paradox, but they can actually work together if you create the right ecosystem for that to happen.

Thank you, Lutz. So let's move back to our Pigeonhole and our next question here. So what allows -- what does allow to drive more impact for a pension fund? Divest fossil fuel-related assets or keep ownership and try to push them as a shareholder or bond owner for decarbonization? A question from Jurgen. Thank you, Jurgen. That's quite a technical question there. Professor Serafeim, any thoughts on this one?

I will try, Katrina, I will try to put it in general terms because I think this -- first of all, I get asked this question all the time. And the second is -- but I think this question generalizes to all of us, meaning that what is really a theory of change? Is a theory of change that, for example, we exclude ourselves from certain activities, from certain organizations and so forth, and we say, I don't want to be part of this? Or do we actually engage, right? And we actually try to drive change from within as investors, as customers, as employees, whatever that might be the mechanism, right? So I think it's a question that is a really, really important question and it generalizes in many ways. And what I say is that probably a combination of the 2 is the way to go. Meaning that one, I think, needs to set certain minimum standards about how you expect an organization to behave in the future, and then actually communicate what is the time line, what is the target that one will need to improve at. And then what are you expecting for people to do. Because I think if you say to -- I think, putting people and organizations in a bad and good camp is not actually quite helpful because it creates a tremendous amount of defensiveness, right? And nobody wants to be seen as bad, like if I say to you oh you're bad, you start being defensive and the same thing with me. But I think if you say actually, how can you improve and I'm willing to actually support you if you are willing to improve, I think it is something that actually can create much more impact over time. So I think there is a very technical and I have a very technical answer when it comes to -- from my investment perspective and from a capital markets, and the technical answer is that we need to be very, very careful in general with divestment because if we actually succeed, and that is only happening in public markets, but all of those companies with potential negative impacts are actually going private, and they are being bought by private equity firms, then we're actually losing both voice but also we are losing transparency, and that could get to worse actually societal outcomes. But I think the more general case is how should we think about this as individuals and our role and the agency that we have to create change. And it's not happening basically by excluding ourselves or actually by enabling ourselves and giving a time limited, arguably, a time limited ability for organizations to improve. Because also on the other side, you don't want to actually engage forever and with no outcomes happening, that also goes back to the perspective of why measuring outcomes and impact and the value of those impacts is actually really critical. Otherwise, you can engage forever on the basis of inputs, and that is not a very productive process.

Nice framing, thank you. Lutz, I'd like to come on to a materiality assessment. And I've seen a question also on Pigeonhole. So perhaps we can start with you and then we'll come to the question. So we've just completed, as Novartis, our latest materiality assessment. Can you tell us a little bit about why we do that as a company and what we learned from that for our focus areas of ESG?

Yes. I think as George had very nicely explained to us, in the ESG space, it's not the more the better. But we need to focus on those pieces that are material to us and where we can ultimately drive change and impact. And we've been doing these materiality assessments every 4 years now for quite some time. And what comes out very clear here is that the expectation and the focus for us should be on innovation and access to that innovation. Essentially, other elements are important as well so that you have safe and effective medicines, of course, that almost goes without saying. But then that if you do this and run your business ethically. That sort of as we read the materiality analysis, is what our stakeholders expect from us. And again, that aligns very intrinsically with our mission and with our vision, how we would like to be seen in society. And then within this ESG continuum, we need to define within the S part access and innovation as the strongest driver for our impact. And again, I mean, without any doubt, the environment is important, we need to consider how can we reduce any potential harm we do to the environment, but that is not going to ultimately define the contribution that we are making to society. So I would say it's all important. But as we hear now from the academic research and as we experience it in daily life, we need to be very focused and our focus, given our specific business that we are in, needs to be on innovation and access. And here, we are creating frameworks like the access principles that I alluded to earlier that help us embed this into the very core of our business.

Thank you. So let's stay on the topic of materiality assessments. And I see a question from Sonya. Thank you, Sonya. So this question to you, George. Managing material, environmental and social impacts makes good business sense. How come investors do not all ask for our materiality assessment results and how we perform on those material ESG issues? So is this a relatively new concept? Where are we on that journey of the materiality assessment?

I think as with everything in this space, it's -- as you said, Katrina, you mentioned it's a journey, right? And I think more and more people are actually becoming knowledgeable about those topics, are starting to ask the right questions and are starting to concentrate on the right drivers. There are investors that fundamentally are not going to be interested in this information. So there is a lot of capital out there that, for example, moves in a very fast pace with horizons that might not make that relevant from an ESG perspective. Because, for example, if you're actually trading in and out of Novartis stock very, very often, most of your ESG issues might not be what you will be looking at and what you will be having as a model. There are many investors also that might actually have a very different view and very different priorities when you're thinking about those issues. So I think if you actually take fundamentally a step back and understand the full spectrum of capital and their different preferences, time horizons and needs you will understand that there is a specific type, I would say, of investors that will tend to show more interest around those ESG issues. And in my mind, those would be, in general, investors that will have longer-time horizon, they will concentrate on the fundamentals of the business. To Lutz's point, how, for example, Novartis might be driving innovation and access and improving quality of the underlying outcomes that the health are observing. And sometimes those investments and those strategic moves will take time to play out in terms of actually improving the outcome. So the same way an investor would need to have the time horizon and to actually foresee and make -- have an expectation and make a bet that those outcomes, that the management team, the leadership in the organization is going to be able to be effective at improving those outcomes.

So let's stay with Pigeonhole. I can see more and more questions coming through. Let's go to our next question, please. And here we go. So companies -- thank you, Ena. So companies disclose ESG information in order to gain legitimacy by stakeholders. Does it necessarily mean that companies are performing better? Or should we be considerably suspicious in terms of perhaps greenwashing? And perhaps that's a question for both of you, but George, I'd like to start with you.

Sure. It's a really good question. And I think in the absence of a meaningful impact measurement, I think I would be considerably suspicious about potential, not only greenwashing, but goodwashing I would say, because there is a lot of that that's happening also in the social space, right? So the fact that the company is disclosing doesn't mean that the fact is actually having less negative impact or more positive impact on those dimensions. And it also doesn't mean that actually it's improving performance on ESG dimensions in the most, for example, in the most financially productive way. So those questions are actually separate questions. And I think in my mind, this is why this is so, so important that we actually get to scalable, transparent and reliable impact measurement. This is one of the things that we have been working with Impact-Weighted Accounts. And I think it's really, really fundamental that we start measuring the value of impacts. And I know that Novartis has been doing that for a while. And in fact, when we started, we drew inspiration from Novartis and from about 50 to 60 organizations around the world, that we were finding and either on specific products or specific projects or overall at a corporate level, they were able to measure the impact in monetary terms and reflect that alongside their profit. And I think this is 1 of the reasons why we need that impact measurement and that impact transparency. And in our research, what we're finding is, I would say, a big disconnect between all the ESG metrics that have been reported and at the same time, the underlying reality which is that there are many organizations that from, for example, a product impact perspective, when you're looking actually at both the scale of the impact, meaning how many people are being reached, but also who is being reached. And then what is the quality of the product and so forth, you're actually realizing negative impacts, right? So in many ways, you're finding that, for example, when you're looking at in the transportation sector, there are many cars that are being provided that fundamentally don't have all the safety features that otherwise could keep people safe. If you're looking at the consumer good companies, you're finding quite many companies that they're making lots of self claims, but at the same time, primarily, they are providing sugar and sodium right? So you're finding a lot of those examples. And the same thing, actually, I would say, for in the employment space. It has become quite trendy for every organization to say how much they value diversity and inclusion. But then when you actually look at the demographics of the employment space, they are not either diverse or inclusive, right? So I think that's fundamentally why for me, it is so, so critical that we start measuring impact because in the absence of measuring impact, it's -- we cannot have accountability.

So Lutz, do you have a perspective on that from a Novartis perspective?

I would start sort of with the philosophy of why are we doing ESG. Why do we engage? And fundamentally, because we very strongly feel it's the right thing to do. It's what's being expected from us. And it's not -- we don't do it in order to look good. And while we would like to disclose in a transparent way, in a reliable way, we would love to have comparative data across sectors, we still have to realize that the rigor of information disclosure doesn't exist. So we want to be transparent. So we communicate what we believe is relevant, is important for others to know. But we would be very happy to use a validated system that puts our efforts to the test and gives greater transparency here. But I think it's ultimately really important to realize that -- It is not about sort of having good scores, but it's about doing what is closely aligned with your company purpose, with your mission and what you believe really ultimately is the right thing to do.

Thank you. So I'd like to move a little bit to perhaps a stakeholder piece. And this question for you, George. So apart from investors, who else can utilize impact valuation results? Is it of interest, for example, to governments when they're looking at GDP, for example, through company operations and R&D investments?

I would say absolutely, it should be. If you think about it, actually policymakers, they are in the -- as part of their function, they have the very, very difficult job of trying to balance different types of priorities and activities, right? And of course, the impact that organizations are creating and how they are creating a system through which we are taxing negative impacts and incentivizing positive impacts is fundamentally a very, very big part of policymaking. So my reaction would be absolutely. And in our working Impact-Weighted Accounts, for example, we have been working here in the U.S. but also around the world with cities and municipalities and local authorities as well, that are actually integrating impact-weighted accounts when they are thinking about attracting businesses to invest in their local jurisdictions and creating an environment where organizations are creating more positive impact. So I think there is a very, very big, I would say, policy application from impact valuation. And I will also add as well that if you think about our system of macroeconomic actually indicators and accounts, a lot of the value that has been created from our investments and taking care of employees, but also preserving our natural environment and so forth, is not really reflected in when we're thinking about actually GDP and many of those fundamental indicators. So as a result, we might end up doing exactly the wrong things because we're not fully capturing the cost and benefits of many of the actions that we're making. So I think there is a very, very important policy application

The next question on Pigeonhole and this one very much about potential short-term tradeoffs, I guess, for long-term gain. So how will investors react if we have to compromise on margins in the short term as we integrate that ESG thinking into our core strategy to unleash the third stage of ESG maturity and business innovation. So thoughts on that, George?

This is a very critical question and I think a very tough one, right? So if you think about it, at any point, that you actually want to make some pivot in your portfolio mix, in your business strategy, in your business model and so forth, there is a significant investment that needs to be made. And that significant investment could, in the short term, depress, for example, your profitability ratios and your margin as you are investing in those kind of businesses. I think -- you can have very negative reactions, but you can also have quite positive reactions. And in the market, actually, in many ways, you are observing both happening at the same time. Look at, for example, what has happened with automobile manufacturers as they are shifting to electric vehicles or look at what has happened with consumer good companies as they have been investing in plant-based protein and alternative actually food products systems. And some of them are actually as they're investing and they're depressing their profitability margins and having very negative reactions. And some of them are doing exactly the same things, but actually, they're having very, very positive reactions. And I think a critical difference that is not often talked about and appreciated is that do investors actually have the confidence that you can implement the strategy? Because it's one thing to actually make the investment because the capital is there, and you're communicating a grand-level vision, but it's a very, very different thing to ask the question about can you implement the strategy and is the organization going to go along with you in terms of the employees, the whole organizational energy being behind you in terms of being able to implement the strategy? And I think that is a really, really critical question. And something that we have seen in the past that this is not always the case. And why it's happening that sometimes organizations are not able to do that? Sometimes, it's I would say, it's a cultural issue. For example, if you have an organization, where actually taking a risk and failing is always something that you are getting punished for, of course, people are not going to take any risks, right? So this is a cultural issue, but also it's an incentive issue, sometimes. People are incentivized not to actually pivot and innovate and take risk and so forth. So both the cultural issue, but an incentive issue as well. And I think the big question about how investors might be reacting in the face of short-term declines in performance can be also a question about their confidence that you can have that those investments will actually be productive in the future.

Thank you. So Lutz, perhaps staying on the theme of investors. Last year, Novartis launched a first of its kind sustainability-linked bond, really integrating ESG into financing. Can you tell us about the aim of that SLB and why we felt it was important to do as a company?

Yes. I mean, the SLB essentially is linked to 2 performance metrics that existed before we issued the bond. And they are, again, linked to impact in our strategic innovative medicines, where we have set ourselves the target to double the patients that we reach over the next 5 years. And then also the programs that we have that specifically target neglected populations and neglected diseases where we are aspiring and aiming to make an impact by an additional 50% of higher patient reach. And to me, it was really a way to show that these are not just nice to have performance indicators, but that we are really serious about those. And we invested about USD 1.85 billion. So not, I would say, a small amount of money against those targets and said, okay, if we reach those targets, then we will have the investor community share in that and give us a bit of a sort of benefit for that. And if we don't reach these targets, then we are sort of getting punished and the investment community gets back a higher return of investment. I think it's important to say, well, first of all, these targets are very close to the performance that I had initially mentioned on innovation and access, which are the 2 big themes for us in the ESG space and in our core business, then linking those to measurable targets and then backing those measurable targets with financial commitment to me, is a very strong signal that we are, first and foremost, true about it. It's not just window dressing, but it's something that we are very serious about and that we are willing to financially commit to. And I would say that's the continuing from purpose, KPIs, targets, and then ultimately, financial backing of those targets that we have set for ourselves.

So next question on Pigeonhole and this one about measurement, I think, George. So what is strong ESG performance? How is the comparison between companies possible? And how can we distinguish what really has an impact?

The way that -- and the approach that we take right now, I mean, we have discussed about many of the elements in terms of like, for example, you need to assess performance or material dimensions. You need to be looking at outcome metrics instead of just input metrics and so forth. But I want to take a step back and add to that as well and also connect to Lutz's point, because Lutz has said a couple of times around kind of like innovation and access. And I think that's exactly right. These are the elements through which Novartis given the core competencies that the organization is having, these are the biggest impacts that they can have on society. And the way to understand that and the approach that we take is that, of course, an organization can have many, many different types of impacts, right? And probably measuring all of them is something that is just very, very difficult. Maybe one day, we'll be able to do that. But right now, we're not even measuring some basic ones. So the approach that we take is we say, let's measure 3 fundamental things. The first one is environmental impact that organizations are having. And what is the impact that organizations are having by releasing actually CO2 emissions and VOC and sulfur oxide and nitrous oxide and so forth, and what is the environmental impact from water withdrawals in water scarce areas and so forth. So that is 1 element. The second element is what is the employment impact that organizations are having? How many employees they have? Are they paying wages above living wage? Are those jobs created even more in areas that are needing them because they might be high unemployment areas? What are the benefits that employee has been provided in terms of flexible workplace and so forth? Are those safe environments in the absence of actually injuries and so forth? Is there -- is the organization, as we discussed before, having a diverse workforce and an organization that is providing opportunities for career advancement and upward mobility? So those are really important dimensions from an employment perspective. And then the third element is product impact, meaning how you're impacting your customers in the communities through your products. And I think there, you're measuring a couple of really, really important things. The first one is [ stay ], how many people you are reaching. The second one is, are you actually serving people that might be underserved in those segments? And that is an extra impact that you're having. So it's about how many, who, what, as well, which is what's the quality of the products and services that you are providing? For example, if you are providing medicine, are people really experiencing better outcomes and actually outperforming what would be already out there? What are -- are the products meeting basically the expectations of the customers and so forth? And those are really, really important dimensions as well. And when you actually put them in a context and then you have a way of valuing those impacts, that is starting to address the question about how can we compare companies. Because then you're starting to understand not only what are the actual outcomes and impacts that people are experiencing and the environment is experiencing, but also when you're starting to value those impacts, then you're actually starting to understand which organizations are having the most significant impact on which dimensions. And allows you to understand, for example, if you're an energy company, yes, your environmental impact is by far the most significant one that you're having alongside any economic impacts that you're providing from access to affordable energy and so forth. If you're actually a consumer good company, it's really about actually the health impacts that you are having on the population from the types of nutrients that they are consuming. And if you're a pharmaceutical company, again, it's about really access and the outcomes that the patients are experiencing, right? So I think that connection from saying, what are the main stakeholders that we are affecting? And what is the value of the outcomes and the impacts that they are experiencing allows you to get to this comparison of companies and really to understand what really has impact.

So perhaps staying on that impact and measurement piece, how can we ensure that emerging ESG standards remain dynamic and evolve over time? Obviously, things are moving quite quickly. Can you tell us a little bit about the thinking behind that at the moment?

It's a really difficult exercise, I would say, because -- the reason is because standards, by their nature, I would say, they tend to be quite slow moving, historically. So for example, if you think about accounting standards, right? So it takes some time years for a standard to be updated. In fact, it can take a decade or so. And also standards require something very, very difficult, which is a compromise, right? Because standards don't fit anyone perfectly and fit everybody just okay. Because there's just such a wide wealth of diversity across companies. And I think part of the challenge in the ESG space as well is that this is a very dynamic space, meaning that things are moving, even [ multi-ality ] is moving over time. And as a result, you need to have this dynamic perspective. So that's why the way that I think about standards, I think about standards as basically building an accountability mechanism in society and allowing for comparability in reported performance across organizations. But standards are not a great strategy tool. I wouldn't use standards for setting strategy inside the organization and for allocating resources. I would use standards as a way for us to accept that there is an accountability role within society and that comparability of information is quite important. So the way that I think about standards is as an accountability mechanism -- as a mechanism to set effectively a floor about what is the minimum amount that we should be thinking about that, we should be reporting on and so forth. But I think organizations, again, understand this distinction, and they don't let standards actually set strategy, but they start from strategy to see how they can allocate resources, what are the most critical outcomes that we want to improve. And then they understand that standards play a very, very important role in terms of defining the floor of responsibility within industries and allowing for the comparability of information.

Thank you. So next question, actually I'd like to go to the one from, I think, a Novartis associate. And of course, I think this is going to be relevant to any associate in any company. So the question is what can I, as an individual at the bottom of the org chart contribute to the ESG efforts of Novartis? So Lutz, perhaps your perspective on the role that actually all associates play in this?

Yes. No, I mean, as I said earlier, I don't look at ESG as sort of initiatives or efforts that are being run through a corporate office and where you need to sign up for. I think in your mandate that you have as an associate of Novartis, it has very closely embedded ESG-related efforts. No matter where you are in the organization, you have the ability to contribute to our mission of innovation and access to innovation. In addition to that, you have the ability to contribute to reducing the footprint that we leave with the environment in your day-to-day choices. And then most importantly, you are a source of creativity for all of Novartis and for us taking sort of us on that journey towards a further investment. So I think it's important that we realize it's up to all of us. If we don't do it, there's no one in a corporate office who is going to do it, and it requires all 105,000 associates to work together with us on embedding the ESG strategy into everything that we do across the entire value chain.

Thank you, Lutz. So I'm going to do 5 more minutes of questions. So perhaps let's move to the next one on Pigeonhole, we'll get as many of these in as we can. So George, in your work at HBS with the Impact-Weighted Accounts initiative, you go beyond considering ESG all the way to monetize impacts, and you've already spoken a bit about that. By when do you think this will be the new normal?

It's really hard to tell, that one. The reason is because I think we're in the initial stages of actually more and more people realizing how powerful this could be, both from the perspective of transforming organizations by highlighting which are the impacts that we're having, generating new knowledge inside the organization, but then also allowing organizations to optimize risk-return and impact. And I think that is really, really important. I do think we still have to make significant progress. I think we are in the metal stages of the methodologies. We still have to make significant progress with actual methodologies. But in my mind, there is a tremendous amount of momentum right now across organizations all around the world, I would say. Across different sectors, across different countries, across different levels of size and maturity inside organizations that are realizing that this idea of impact valuation and monetization of the impact and creating an understanding of how organizations are creating value and creating profit is a very, very powerful idea. So my expectation is that we will be that in the next 5 years, we will see an exponential growth in the organizations that are creating some form of impact-weighted accounts. And they are using them really as management accounting tools and also as reporting tools.

So Lutz, I'm interested in learnings. We've gone through a lot ourselves as a company. What are some of the learnings you observed for Novartis as we have really evolved our ESG thinking over time that you might share with other leaders who are embarking on this journey?

Yes. I think it is that journey that we've been on over the last 20 years, starting, I would say, with a donation model to address pressing emergencies in the world, now towards this embedment into the very core of our business. And I think it's a huge source of inspiration for many of our team members. It's an area that I think people who join the pharmaceutical industry would like to have a positive impact on society. So I think there's a huge resonance here. I think it is to leverage that excitement that we see across the entire organization while at the same time still being very focused. And then I think what we have also seen over the years is that sort of the skills that we need in order to deal with ESG matters changes over time. Because initially, you need sort of people who drive those programs, those initiatives. And then when you come to embedding those into the core of your operations, you need very different skills. You can't be a lonely warrior, but you need to be someone who integrates, who builds bridges, who influences without formal authority, who sort of rallies an organization behind an idea and behind a principle. So I think in many ways, we have had tremendous learnings over the last 20 years that touch upon strategy, implementation, culture being a very important element -- how do you create a culture that, at the same time, supports your efforts? So I think it becomes more and more holistic. There's many different pieces that matter here. And sort of you need to course correct as you go pilot, scale potentially sort of dismiss your pilot, try something new, but I can only say, I mean, it's hard work, but it's also a lot of fun.

So George, the last question to you. Do you have any recommendations for companies or senior leaders who are really looking to embed strategy into their business operations?

I think I was just going to perhaps repeat a couple that I have already mentioned. But I think viewing ESG from a strategy perspective, not from a compliance perspective, which really means that they're not concentrating on how I can improve my ESG rating or my ESG score or this metric and so forth, but actually taking a step back and understanding the impact that you're having on different parts of society and how you can actually use fundamentally the value creation process inside the organization to drive more positive impact. I think those are a couple of critical components. And then from an implementation perspective, how do you build an organization that's truly a purpose-driven organization, meaning that people across the whole hierarchy, from frontline employees, people that have just joined to people that have been in the organization for a very long time, they feel that the organization is authentic and that they have agency inside the organization for their voice to be heard to bring out innovative ideas and that the organization is willing to experiment and sometimes take real risks. Because if there is no risk, if there is no cost, then, of course, purpose is not -- there's no credible commitment to that purpose as well. So a couple of those ideas, I think, generalize and are quite implementable for leaders across all organizations.

So that concludes our Novartis lecture today. I would like to give a big thank you to Professor Serafeim with your deep expertise and insights, you make quite a complicated topic very simple, and we really appreciate your time today. And thank you, Lutz for also sharing insights from a Novartis perspective and bringing some of that to life in real life examples. And huge engagement from everyone online. We can see that passion and interest in the questions we've been receiving. So thank you for everyone's active participation. So thank you, and I wish you all a great rest of your day. Thank you very much.