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Barend van Bergen

Welcome to the Health Sciences and Wellness podcast, titled “Measuring and Managing Value to Society.” My name is Barend van Bergen. I am a partner at EY in our Strategy and Transaction practice, and I've been working over the last 20 years on sustainability, helping investors and companies come to grips with sustainability. We see that companies are increasingly getting interested in better understanding, measuring, managing their impact, and applying those insights to what we call “use cases” (for example, investment, appraisal, strategy, development and innovation). And I'm really glad that, today, I'll be joined by Sonja Haut. Sonja is the Head of Impact Valuation at Novartis. I've been working with Sonja over the last couple of years on a number of projects in this field, and we thought it would be a really good idea to talk about this topic in a bit more detail There's obviously a lot of discussion around ESG impact, but we thought it would be good to hone in a little bit more on the practitioner view. So Sonja, without further ado, thank you very much for joining, and the listeners would love to hear a little bit more about you. Over to you.

Sonja Haut

Thank you very much for your kind introduction and welcome, everyone from my side. As Barend said, my name is Sonja Haut, heading impact valuation at Novartis. As part of that role, I've been working on measuring and valuing the company's impact on society for the past seven years. I've been with Novartis for over 20 years with roles in finance and in IT, and all of that has certainly helped me in delivering the value to society results and statements that that we now use throughout the business. But more to that later.

Bergen

Thank you, Sonja, for that introduction. And maybe let's start with an easy question. What does sustainability mean to you and your everyday work?

Haut

You may recall that I'm a trained mathematician, so providing definitions should be an easy one indeed, but it's not. The topic of sustainability has really broad ranges of meaning to a variety of people, but you asked me for my take on the word. So, my take on sustainability is that it signifies the long-term value creation within planetary boundaries and respecting human rights.

Bergen

Yeah, I know there's a lot of definitions out there; thank you for sharing that one. And then maybe a related question. I know you have quite a broad background, but why have you started to work on this topic within Novartis?

Haut

It was really 2015, seven years ago that we got into the topic of impact valuation with concrete projects testing the approach and into country examples. The reasons we did so were threefold. One was could we find an approach that helps us make better decisions that are more encompassing, taking on so-called nonfinancial, nontraditional metrics as well? And would these types of metrics, this piece of information, be also meaningful to engage more effectively with a broad range of stakeholders? And then lastly, should the first hurdle be taken to the first two; would that have the potential to be used in disclosures? So, it was these three objectives: own decision-making, stakeholder engagement and disclosures.

Bergen

And at the time, I think you came from a finance IT background. What made the topic of sustainability impacts so appealing to you?

Haut

That's right. When I came across the topic, I used to work in our accounting department. I had the role on designing information and reporting processes across the divisions. Working in the headquarters in finance exposed me to questions we received externally on so-called nonfinancial metrics, and the fact that they arrived in accounting triggered several questions and debates on what we should be doing about these things, particularly as the questions on finance were a bit all over the place. It was clear that there was an interest, but not a clear structure that informed that interest. So, we touched base with other departments, strengthened those links to understand what their thinking was, and were starting to think what the role of finance is in all that and how we should be engaging. And the result was a joint project with our corporate responsibility department to investigate impact valuation.

Bergen

Thank you. So, against that background, let's dive a little bit deeper into value to society impact, measurement and valuation. So, how would you define impact measurement in valuation, and how does this help business and wider society? What is your view and specifically of the health sciences and wellness industry?

Haut

On the topic of impact. Well, I think we all now have a valid definition provided by the G7 Impact Task Force toward the end of last year. And that impact is a change in the wellbeing of a stakeholder or the environment. And I think from there the question becomes what does one do on the valuation of such impacts? We opted for the valuation in monetary terms. It was a very natural thing for us to really use that type of valuation over others just because money is the language of business, and it was clear that that would prevent us from having to introduce yet another framework to business leaders. As far as what does it do to the wider industry? I think the jury's out. We don't know yet. So, we contributed to the space with a number of case studies exploring elements of the impact, measurement and valuation practice that I believe are transferable to other business situations. So, there is a case study on environmental impacts along the supply chain, one around the social risk exposure on supply chains, then things around the social impacts of fair pay, living wages, this type of things, which I believe is pretty much transferable to any other industry as well. And then there are more industry-specific topics like the social impact of medicines.

Bergen

Right. As you alluded to, obviously we all know the well-known quote from Peter Drucker, “What gets measured gets managed.” And obviously you have to sort of narrow in on the focus areas and the metrics, right? That you decide to measure and start monetizing in some cases. And I think, a lot of companies probably struggle a little bit with that. You know, how do I choose between right and right? There's a lot of important focus areas, there's a lot of metrics, a lot of sets of metrics out there and frameworks. So, how do you as Novartis and your team, how do you strike the balance and make sure that you sort of measure what really matters?

Haut

Yeah, sure. I mean, at the onset we had the luxury situation of an established materiality assessment process within the company. So, we could really use those insights to see which are the agreed areas that matter most. And then from there, either look for or work on to evolve what impact metrics for these areas that stakeholders agreed are most material to the company. Now it's still I think the other challenge that you mentioned embedded in this is that we've moved collectively from a situation where the entirety of sustainability topics was not measured at all, not quantified at all, and just captured by stories and anecdotes to an area where we now have a firm, I don't know how many hundred frameworks and thousands of potential metrics. So, here I think another benefit of impact valuation is really that it lends itself to a simple way of displaying the results.

Bergen

Let's talk a little bit more about these use cases. So, how does the Health Sciences and Wellness industry stand to benefit right from, you know, basically measuring and managing those impact insights and applying them to your business? Can you talk a little bit about that specifically in pharma, in Novartis? What are some of those use cases? How do your colleagues use this information?

Haut

The most visible use case is the one in stakeholder engagement, where colleagues find different ways of talking about who we are, what we stand for, and not leaving it as at the level of statements, but really underpin this with the impact statements. And now that we've been applying the practice for a number of years, being able to trace the story and the evolution over time and peel back the onion and explain what has happened and what the concrete actions were in support of the one or the other topic that stakeholders had felt we needed to improve upon.

Bergen

And maybe a bit more detail on your former point like stakeholder engagement. How are different stakeholders responding to the information that you put out there?

Haut

I think over time, confidence has just increased that it works. So, initially, a few use cases were around putting the results together for a specific event like a stakeholder engagement event, something that has been in the planning anyway. So, the anniversary of a memorandum of understanding in South Africa comes to mind where things just nicely come together with our initial results, including the social impact of medicines. Other countries have utilized a smaller sounding board of external stakeholders to understand whether those messages would land well or what would need to be done for them to be understood. Also in line with what are the most material topics and how would people react. That has also worked surprisingly well, I say surprisingly because, Barend, when you and I started to work on the project back in 2015/2016, I was quite worried about the assumptions that we had to take on, but intriguingly, once we had the results, the debate was more on the implications of that. It wasn't so much on the nitty gritty of the Excel sheet constructions behind underneath all that. But people were jumping at the implications on what this means in terms of impact on society, value to society, what it is that they would like Novartis to do better, more or less of improve upon. What I found intriguing, irrespective of the geography and the prevailing local issues—there were always touchpoints that we could find that made the impact valuation results relevant to our colleagues locally and their external stakeholders, which is, to me, one of the reasons why the approach is so powerful and potentially transformative.

Bergen

I would agree that these impact data and insights can be very powerful. We also see that this is now increasingly being used, for commercial purposes, even recently to fend off a hostile takeover bid.

Haut

Yeah, indeed. The G7 Impact Task Force has come forth with two reports, and they also feature capital market access and a valuation approach supported by impact valuation, which is quite intriguing I think, and may be proved to be the most powerful of all the approaches in the long run. We'll see.

Bergen

That was, like I said, a very interesting approach to valuing in the balance sheet.

Haut

There's been a lot about economic resilience and the link of health and wealth. And this link is now so much better understood that there's been a policy brief to the G20 Health Ministry put forth by the G20 Global Health and Development Partnership. That, amongst other things, recommends impact metrics to actually help the health sector be accountable for what it is they deliver. So the proposal contains an ask to the health ministries to actually judge the health sector and its players according to a SOFA return on investment. And if they were to follow through, then companies like ours would have to actually show their social impact through their medicines, through their health products on society to be able to express that. And actually just because of the type of industry we're in, this is just more clear than it may be in other industries.

Bergen

And so, Sonja, could we see that as an extension of value-based health care where, you know, companies are being asked to explain also the economic contribution of the product and services in health care system strengthening activities. Would you see that as a natural extension or expansion from value-based health care?

Haut

In a way, certainly it would have to be adopted more broadly. And you know that there are lots of additional caveats, but, in a way, certainly because this notion of a social return is a way of expressing value-based medicines/value-based health. And I think that's an important element to also further explore and discuss possibly within the industry on how that should be dealt with in the most effective way. I think there is an upside in instead of trying to counter this with defensive measures, instead going forth and articulating what everybody thinks their value is to society, rather than implying that things will just continue as the they used to be. And I think also by doing so, the benefit for the entire ecosystem would be that one could have a debate on this notion of willingness to pay. So just have a broader perspective on the overall services, and how would all of that play together in terms of societal agreement with which tradeoffs? I know this is rather abstract, but as soon as we dive into topics like demographic evolutions and ever-rising health care costs, the question becomes how does one conceptualize this at all? And what would be new ways of defining a business model in view of all these changes? And I think one key element of that would have to be transparent on what the value is that one brings. And this transparency has to resonate with those stakeholders that get it provided and that I think it has a potential but requires a huge potential actually in order for this to be realized; they will require as many players to join for a seat at the same table.

Bergen

You talked a bit about what impact measurement valuation can do to your sector and Novartis. What other exciting use cases have you seen elsewhere in the world and anything that sort of jumps out over the last 12, 18 months?

Haut

Lots of things jump out, Barend, and hard to prioritize. So, in random order, capital markets valuation, I found quite unique. Then there are a number of companies who in their business models already have something that you might call sustainable or aim at providing solutions, addressing societal challenges like through windfarms or LED lights. And I found it impressive how some of these sustainable innovations still require an explanation. So, and this is a link to our business as well, where we found several times that raising the awareness on what an innovative product really brings is required, even if you think on face value, that's a no-brainer. The entire movement on banking for impact, which I became aware of only recently. But that is an intriguing thing because I believe the entire capital market activity would have to pick up on signals like ours for this entire thing to really scale big time. I also think banking and the finance sector as a whole would have an interest in this type of transparency because it would help them to structure their products more effectively. I know a number of the Value Balancing Alliance peers have been experimenting with impact valuation, but not yet disclosed their findings and insights and the way forward. But yeah, clearly plenty of exciting movement in that space.

Bergen

Absolutely. Again, yeah, very encouraging to see again the demand of companies, and not everybody will disclose ultimately. And then, Sonja, were instrumental in developing at Novartis; I think it's already the fourth annual co-creating Impact Summit. And again, I was quite impressed. I think it was end of last year that you brought together 1,800 delegates basically to come together and talk about impact. So question to you, I mean, why did you in the first place decide to organize a summit like that? And what are some of the key takeaways from that leaders’ summit?

Haut

I'm glad you like, Barend. Thank you. So the history of it, the evolution has been that, indeed, this was the fourth summit of this kind. The first one occurred in 2018 and was actually an internal gathering. And at that time, we had given ourselves an external impact valuation advisory council to have a sounding board for some of the evolutions and clearly help us direct our focus in terms of where to take the approach next and whether any of the elements that we found would make sense from the point of view of established practitioners and experts in the field. So, in 2018, this was a very small gathering. Then the 2019 edition, again, an internal summit, it was really already a movement in that we had internal use cases that were so clearly driving value that really we attracted such a large number of colleagues who then also demanded us to take it externally and that like, why don't we speak about this more broadly? So this is what we did then in the consecutive two years: 2020 and 2021. And to do so, we found it best to actually debate the topic of impact only indirectly. So not through a metrics debate or a technical debate, but more from the topic of, hey, what are the concerns out there, and where are the economic players headed? What are the unifying elements on the investor side, on the business side, on the academic side, for governments in their various roles and how to make sense of it all and basically bringing this element of reality to everyone, that is. I think the number of attendees, the types of feedbacks, the quality of the debate has clearly shown that this mindset around focusing on impact, measuring what matters to stakeholders and really following through on that is a winning formula that is worth going after.

Bergen

Again, I would recommend. Listen, I have I had nothing to do with the summit, so I can independently recommend this to the virtual exhibition platform. Let's pick up the crystal ball here. What does the future hold on the future of impact measurement and valuation? How do you see the future in terms of measurement?

Haut

I do believe that this topic of use cases that are essential for core business, that are really at the heart of value creation in the long run will increase. And I think there will be more and more companies making their experiences public one way or the other. I think that would be based on the grounds that this helps them to both be effective in their business and finding better ways of doing business in view of the changing ecosystem for them, but also in response to the many demands that are thrown at businesses. If you wish a prominent shortcoming would be that, say topics of social impact of diversity inclusion is not sufficiently captured on that level of impact that might be inputs and output parameters, but not impacts. Similarly, biodiversity also, then I'm sure that these prominent gaps will be closed effectively within the next five years.

Bergen

That's again, very, very encouraging. And then as a last and maybe not an easy question, to round off, what particularly excites you in your role?

Haut

Barend, this will be repetitive, but it's truly that, I believe, of this entire topic of metrics makes the most sense if it helps advance business as opposed to being an add on, a nice to have. So, to me, this area of really finding an information flow that helps businesses be successful and successfully engage with their stakeholders, including the shareholder, is really an area that I find totally fascinating. And I believe there is value in it for all the participants, which is the reason for me being so passionate about the topic.

Bergen

Thank you very much, Sonja, and thank you for sharing your perspective with the listeners. I hope you find it useful and looking forward to continuing our dialogue. Thank you very much.

Haut

Thank you, Barend.

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