Novartis AG (NOVN) Earnings Call Transcript & Summary

Good morning, good afternoon, good evening. My name is Sonja Haut, and it's my great pleasure to welcome you to the Co-Creating Impact Summit 2020. It is the third time that we hold this event, together with the Novartis Impact Valuation Advisory Council, chaired by John Elkington, and it is the very first time that we opened it to external participants. We have about 1,000 registrations for today, and we'll still keep this as an interactive and engaging event as ever possible. You can place your questions into the chat throughout the entire day, and there is also an opportunity to continue to discuss and exchange in the virtual coffee corners. Ahead of today, we invited you to have a look at the virtual exhibition and take a survey. And for the Novartis colleagues specifically, there was an opportunity to interact on an event-specific Miro board. So John, as you kick us off for this summit today, what has stood out to you so far, please? And how would that relate to this very unusual time we've seen in 2020?

Well, it's certainly -- hello, Sonja, and hello, everyone. And what an extraordinary tribal gathering. Well done, Sonja and your team, for pulling all of this together. I was reading The Financial Times this morning. I'm just seeing that Pope Francis has just backed the Council for Inclusive Capitalism. Now so God is on our side as well. But I think the serious point is 2020, I think we'll look back at in a few years, and see it as one of those inflection points where, suddenly, a lot of things changed and in a very short order. A number of people have been saying that the pandemic has accelerated. Things were already happening by about 3 to 5 years. And I think that's true in the area that we'll be focusing on today, which sort of impact and value and sustainability and all of these good things. But in the same issue of Financial Times, Martin Wolf, the economic sector of FT, is arguing that the era of Milton Friedman is now over. The idea that all business has to do is meet the laws and then deliver stakeholder -- sorry, shareholder value. That period is coming to an end. I think we'll hear a lot of that sort of thinking today. We're also seeing convergence. I mentioned impact on value, health and wealth, people beginning to realize that we live in a very much more interlinked and interwoven world than perhaps we might have imagined. Yes, globalization is now on the back foot, but we face -- and people are increasingly aware that we face a set of systemic challenges, and they're all linked. Young people are critical in all of this. It's their future -- is perhaps some of us. But also, they would have every reason for being pretty put out and upset at the moment. So I'm thrilled that so many younger people are involved in this virtual summit. So congratulations on that as well. And just a final thought. I think this is to myself as much as to you all, but let's look after ourselves through this meeting. Let's sort of stand up and stretch periodically, let's drink water and all the rest. We've got plenty of breaks for that. But this is going to be a pretty intense meeting. And for many of those who see it right away through the day, it's going to be a pretty long one. But I think it's going to be worth the time. It's going to be worth the effort. And again, Sonja, well done, and back to you.

Well, thank you, John, for this outline. These thoughts will stay with us throughout all the sessions. Now let's go into Session 1, Measuring and Valuing Impact, chaired by the IVAC member, En Lee. En, over to you.

Thank you, Sonja, and thank you, John. Hello, everyone, and a warm welcome from Singapore. I'm delighted to meet all of you virtually and to see such a strong turnout today. My name is En Lee, and I lead the Sustainable Impact Investments in Asia at LGT. For the past 2 years, I've had the privilege of serving on Novartis' Impact Valuation Advisory Council. Now just to echo what John said, in these unprecedented times, impact has become ubiquitous, and measuring and valuing impact has never been more important. Now today's panel, with a focus on Asia Pacific, we are honored to have a diverse panel of experts to share their valuable insights with us today. And this session would not only explore the interesting perspectives from funders, from companies and from governments, but also share what are best practices in terms of impact measurement and valuation. So with that, I'd like to start with our first speaker. She is Naina Batra, Chairperson and CEO of the Asian Venture Philantrophy Network, or AVPN for short. AVPN is Asia's largest social investing network with over 600 funders across 34 countries. Naina, a big warm welcome to you. And I wanted to ask -- start off today's discussion with you on why has impact measurement and valuation gained increased interest and momentum in Asia? And what do you see are the key trends and opportunities?

Thank you, En, and thank you very much, Novartis, for inviting me to this absolutely important and very interesting event. I loved how it was referred to as a tribal gathering, and I definitely feel that I am here amongst our own. It's a very important question you asked in terms of what are the trends in Asia Pacific around impact measurement and impact valuation. But before I go there, I thought I would take a few minutes just to talk about how I see the increasing trend around impact in general in Asia. So if we could just go to my slides. Perfect. And if we can go to the next slide, please. So for those of you who are not aware of AVPN, and thank you, En, for introducing us, AVPN is Asia's largest social investment platform. And as this platform is very wide, we bring together all of these different groups of capital providers on one common platform, and they all seek to drive impact by mobilizing different types of capital, whether that capital be grant, whether it be debt, whether it be equity. But it's not just financial capital that we are talking about. It's also leveraging financial capital along with human capital and intellectual capital. Could we move to the next slide, please? And why do we see an increasing interest in Asia Pacific, specifically around mobilizing capital for impact? Well, if you look at the gap that exists for Asia Pacific to meet the SDGs, we need USD 1.5 trillion to meet that by 2030. So there's definitely a big financial gap. We also have a huge concentration of wealth. Asia is said to have 1/3 of the world's billionaires. And we find that there will be the biggest transfer of capital for the older generation to the younger generation in Asia, and more and more of the younger generation is interested in tackling societal issues through impact investing. However, at the same time, there is still a lack of an enabling environment. And Asia Pacific is considered to be very nascent as far as impact investing is concerned when you compare it to the more advanced markets of Europe and the United States. Can we go to the next slide, please? Thank you. But we are seeing some very interesting trends on -- in terms of impact valuation. So Hong Kong, for example, has one of the largest green bond schemes globally. It has raised more than USD 1 billion from the sale of its first green bond to fund projects in the island state around transportation, air quality improvement and green buildings. This favorable response from global investors indicates that not only do they recognize Hong Kong's credit strength, but also are incredibly supportive of Hong Kong's efforts in promoting sustainable development. The Hong Kong Exchanges and Clearing, or HKEX, which operates the city's stock market, will be toughening requirements on climate change and social issues to tackle the challenges of those companies who did not meet the comply or explain disclosure rules on environmental performance indicators. And just a few days ago, HKEX also launched the Sustainable & Green Exchange, or STAGE, which is Asia's first multi-asset sustainable investment product platform to support the fast-growing demand for sustainable finance, not just in Hong Kong but across Asia Pacific. We find that STAGE will provide greater access and transparency on products and also resources on sustainable finance-related information. At the same time, STAGE is planning to collect data to form a benchmark for those issuers who are seeking to raise funds for sustainable projects and will contribute to the standardization of sustainability metrics. Now if we move to Singapore, it's not far behind. The Monetary Authority of Singapore, or MAS, is also building capabilities in the financial sector to incorporate ESG considerations into financing decisions and drive long-term sustainable economic growth. This includes partnering with academic institutions, such as the Singapore Management University, not just to look at developing metrics, but also to build a talent pool of sustainable finance professionals. . Last month, MAS also announced the launch of the Green and Sustainability-linked Loan Grant Scheme, or GSLS. The GSLS is the first of its kind globally, and this will also support corporates to obtain green and sustainable financing by defraying the cost of validating the green and sustainability credentials of the loans. The scheme is also planning to encourage banks to develop green and sustainability-linked loan frameworks to make such financing much more accessible for corporates that meet these goals. Before I move on, I want to also talk a little bit about India. India has seen some of the largest uptake of the global impact management approaches such as the IMP dimensions, the UN SDGs and Iris+. These are all beginning to gain popularity and are being leveraged by funds that have developed sometimes their own proprietary measurement system. While the industry spend on impact measurement appears to be within the range of 5% to 15% of the fund's operating budget, it is difficult at this point to identify this separately due to the internationalization of impact across all their core functions. . However, we find in India, the Small Industries Development Bank of India, or SIDBI, has introduced a sustainable finance team to support projects like these that contribute to energy efficiency and cleaner production but are not yet covered under international or bilateral lines of credit. The definition, however, we find in India is not very clear, and therefore, nothing very substantial is unfortunately being done about it. Despite this -- despite trends in Singapore, Hong Kong and India, we are finding that for the rest of Asia, the impact valuation space is still rather nascent. If we can go to the next slide. A couple of reasons for this. The first one is the difficulty of integrating financial and impact data into investment decisions. We are lacking a standardized approach to designing impact ratings that investors are able to align to in order to holistically assess their impact performance. There is also a need to build a capacity of investors to integrate impact and financial indicators in order to assess the performance of their investments and inform their long-term portfolio management. Secondly, because we are still in an early phase of adopting a variety of social finance approaches, such as ESG investing or impact investing at scale, there are costs involved in terms of educating the practitioners and implementing these new policies. So I think it's important for policymakers to provide incentives or banks or capital providers to also take a much more longer-term view and not charge all the development costs upfront to the investors. And finally, without the clarity around the nature of social finance approaches, impact frameworks and concurrent investment strategies, the field can become very fragmented, which results in allegations of impact or green washing, thereby undermining the integrity of the industry and adversely affecting its growth. Could we go to the next slide, please? I believe having a consistent framework to assess impact will help both asset owners and fund managers to communicate clearly about impact goals and performance across multi-asset and multi-fund portfolios. We are seeing a framework and standard-setting institutions of international significance coming together to collaborate and find clarity for organizations that are adopting these standards. We are also seeing actors across the ecosystem who are doing their part to overcome these challenges. One of the most important drivers would be ecosystem builders, like ourselves, who cannot only provide capacity building support for investors and deals alike, but also create a conducive environment for impact investing. And AVPN, therefore, has looked at partnering with the likes of IMP and GIIN to try and see how we can socialize the different types of impact measurement, impact evaluation frameworks across Asia Pacific. Next slide, please. I'm going to stop there and hand it back to you, En.

Thank you, Naina. No, thank you for the excellent overview of Asia. And it's obviously -- it's great to see increased interest as well as the regulatory momentum behind impact in Asia. And I'm sure many of our European friends and colleagues on this call will see that a lot of them seek to ride on the coattails of some of the initiatives in Europe. We'll come back to you, Naina, in the Q&A. But I think for now, we'll move on to Hyungguen Park. Hyungguen is the Director of Social Value Management Centre at SK Group. Many of you will know that SK Group is a pioneer in thinking about impact measurement and valuation, and at the same time, it's one of the largest and most successful conglomerates in South Korea. Hyungguen, it's a pleasure for you to join us in the panel. And I guess, just to help frame some of the points that we'll love to learn from you, is from a corporate perspective, why is impact measurement and valuation important? And particularly, if you could share some of the frameworks that you use as well some of the challenges and the opportunities that you see both within the company and within Korea more broadly, that will be extremely interesting for our audience today. With that, I pass it over to you.

Thanks, En. And first of all, many congratulations to Novartis for organizing this excellent event, and thanks a lot for inviting us to share our story. Next slide, please. Yes. I'm going to talk about 2 issues: first, why is impact measurement and valuation important to SK, and then the opportunities and challenges we've had so far. As John talked about, I mean, increasingly complex global challenges/changes, like it or not, I mean, it requires transformative change and inclusive change. And one of SK's response to this external, well, pressure maybe, and an internal understanding of the need for change, in 2015, we added creation of social value as a new corporate mission purpose, not just our own growth, but grow with -- together with the society and wider stakeholders. And in 2018, we introduced our double bottom line management system to implement -- to pursue both economic and social value throughout the entire business process. We introduced this system because often, the importance of ESG and social value, we talk a lot. But without concrete action, it will remain just rhetoric. If you look at the diagram, it's a simplified expression of the DBL system. In a blue circle, it's actually a measurement system. Why is it important? First of all, the subsystems from measurement, KPI and then social-value-based business model, these subsystems should go hand in hand. And we believe measurements can be the backbone for bringing about this change. For example, KPI, we introduced this ratio, not only economic value, but also social value we calculate for the KPI assessment. So this is a short introduction to our DBL system, management system. Next slide, please. So what to measure? These dimensions is for our impact measurement. These are 3 pillars: first, indirect economic contribution; and business societal performance; and social contribution. In particular, the second pillar, we measure impact of our operation and product and services. Aligned with the ESG consideration -- I'm not saying this is the exhaustive, covering all aspect of social value, it also -- we update, for example, land use and biodiversity, it's newly added this year. It's a result of the interim research from the VBA initiative. So we will keep updated this framework. Next slide. So what are the opportunities and challenges we've had throughout the application of the impact measurement methodology and valuation methodology? First, I think we have a better understanding of wider subject-object relations. For example, simple linear relationship, in the past we care about like a customer company and then shareholder company, something like that. But increasingly, throughout this DBL management approach, we realize there are many very complex relationships we have with our impact on local economy and then greenhouse gases maybe on the other part of the world. So it's all about learning about often invisible but real relationships we have. Second is we can make decisions with better intuition. Of course, descriptive numeric indicators, they are quite useful. But for business, I mean, for us to make a timely decision, often, this monetary, the -- I mean measuring impact in monetary terms is quite helpful. For example, you can ask the same question, how much of fee you generated last year? You might ask like, "Okay. Our product delivered to 1,000 customers and they're feeling different experience, et cetera." But then it's like -- it's quite a time-consuming practice and you have to analyze again and again. But if you give an answer in a way like, for example, "We generated USD 1 million through product ABC, but product B is maybe negative impact we have to improve." Something like that. The third point is we now identify gaps of this cost in practice. I talked -- I mean, the -- if you don't have a clear understanding of baselines, where to start, and target for future change, I mean, it will remain just a rhetoric even if you -- how many times you talk about ESG and social value. Evidently, we are seeing an increasing number of social value-driven business models. But at the same time, however, we also face some challenges. First, the methodology and its application data is not always available. It's a really critical issue. I mean, one of the employees actually talking to me was appointed of like putting all the efforts to innovate our product and service, if it is not properly measured and acknowledged. So we have to continue putting more effort to find out and then generate reliable better data. And also different meaning-giving activities is important. When we measure our impact, we start to begin by defining which social problem our innovative product service actually corresponds to. But people have different ideas. Some people define this as a social issue, but it's not for the other groups. And then conservatism, one of our measurement principle. We apply very strict criteria, quality of data. Often, it can lead to, I mean, de-motivation, as I explained before. And in terms of acceptability of advocacy, green-washing issues, I mean, understandable. But last year, for example, for the second pillar, our society performance, we announced $2 billion cost in our performance. I mean, we actually disclosed the environmental and social cost we actually brought about. So we have to continue to talk to -- have more dialogue with wider groups of people to understand -- to make a shared understanding. And different levels of internal perception. Of course, we have to continue to give more training, workshop internally and with other outside groups and communities. And delayed integration of the social value into the entire business process. It's been only 2 years, very early stage, but -- and then obviously, it takes time to fully integrate ESG considerations into every single aspect of our business. So what do these opportunities and challenges mean, actually? I think we will continue to improve our own methodology, but at the same time, the evidence -- experience-based evidence can actually -- can be a big contribution to global standard processes. For example, our excellent partners with Novartis and other VBA members, we are now working on trying to give more practical input to global standardization processes. As you know, ongoing debates over like a single/double materiality, use of different terms and languages, different definitions of [ additionality ], which baseline you have to measure against, et cetera, I think more participation, applying this type of methodology to different contexts in different countries, we can, together, can make a bigger contribution to this global standardization process as well. So I guess, that's it from my side.

Thank you, Hyungguen. Thank you for sharing the excellent work that SK Group has been pioneering in terms of the DBL framework. I think it really resonates with some of the issues that you also mentioned in terms of impact washing and trying to get standardized and quality data, which has been a traditional pain point, something that also aligns very nicely what Naina mentioned as a potential growth area, something we'll come back to in the Q&A questions later on when we finish the last presentation. So just a reminder to all attendees, feel free to use the chat to put your questions down. We do have about 10 or 15 minutes at the end. We will have an open panel discussion. So please feel free to put your questions in the chat, and we'll come back to them at the end. So next up, we have Federica Conci. She is the Country CFO for Greater China for Novartis. And Federica, we have the pleasure to chat last night, and I know that you are currently in quarantine in Italy, but has spent many years, I think, over a decade in Asia. We would love to know your perspectives because Novartis obviously is a pioneer to impact measurement evaluation. What has been your experience as CFO?

Yes. Thank you, En, and good morning all. Really my pleasure to participate to this inspiring summit and have the opportunity to really share with you some of the experience we have had in Novartis in China. Actually, when I was preparing for this summit, and I was thinking about the agenda and some of the things that could be of interest for today, I did a lot of reading. And I must say, there is a lot about ESG coming up, especially in 2020. So what really stood out for me is to see how so many articles were talking about the role of the CFO in the context of ESG and especially in this impact valuation. So I'm sure there are many CFO colleagues connected today, so I hope that you will also feel inspired after the summit and take even a more active role in driving forward impact valuation. Of course, our role as a CFO has been evolving, has been expanding also over the years. So it's beyond financial information, for sure. And as part of this partnering, I really like to see how CFOs are contributing to continue to create value, so the concept of value creation. And I was even inspired by one thought around -- imagine in the future, even our name as a CFO might evolve into CVO, which is Chief Value Officer. And so I came into this summit so inspired about even my role might change in the future to become even more meaningful. So as a CFO, so we like figures. And this is why I believe, to bring ESG to life, based on my experience, it's really important to have this element of measures. So combining value and measures is really the essence of all of this impact valuation. And Novartis has adopted the FES, which is the financial, environmental and social impact valuation which is, in essence, it's just a series of KPIs and approaches, methodology to really assess if society is better or worse off as a result of the Novartis business operation. And why it's so powerful? Because really, it's trying to monetize in a way the impact. And translating this impact into measure, reliable, relevant and comparables is also making the way we can communicate the impact to society more meaningful, more credible with our stakeholders. . So our experience, when we started with FES about 5 years ago, and this is the global initiative led by Sonja. So we had at the beginning, admittedly, some challenges because we had to learn about the methodology, we have to gather the data, information. But I'm really encouraged to take the time and the effort to do that because the results will be really inspiring and unbelievable. So we have then taken the measures and embed them in our story. And in Novartis China, the story is quite inspiring. If you think about Novartis Chinese name itself, nuòhuá, means actually commitment to China. So perfectly, I would say, reflects how the company's long-standing ties with China, more than 130 years, but also very close to the ESG philosophy: the endeavor to improve health care standards and also quality of life for the many millions of patients. And so when you think about some measures in our experience in China. So from F, so financial perspective, I think it's quite straightforward. You start from your direct GDP, but then you also add what is the indirect GDP, so what is really the value of the service and goods that are really contributed from all the employees of the company. And then you add the [ E ] one. So you look at the whole ecosystem, from your vendors and the channels, and you add all of these. We actually contributed in 2019 to almost USD 3 billion into the China economy. And then from an S perspective, which is the one where I feel actually more inspired, is the social impact that we bring. And with the FES methodology, one item I really love is the one around the social impact from our products that are really helping the quality of life of many, many patients, millions of patients in China. So -- and this can be done in many ways through different patient support program. We have in the last 3 years also listed 25 products, so bringing innovation into China through the listing in NRDL. But I think what really came out from this experience is that by bringing all these measures of the FES, really focusing on the benefits, the positive impact that we can have on society is very [ credible ]. And what is very important is to have a clear, compelling stories and embedding in the stories the measure that come from FES. So really very exciting journey, and I think also very fulfilling and enriching experience for me as a CFO. So thank you, En.

No, thank you, Federica. I really like what you mentioned about sort of future focus, right? Because quite often, when we talk about the rise of ESG or sustainability or impact, these are all future-focused concepts. It's always trying to think what is the value of these things in the future. So I really like what you mentioned. I think we had a question or a comment from one of our attendees to say, can you share some relevant articles about the importance of the role of CFO. And I agree with you that it's super important now given the materiality of impact, that CFOs think about this. So if you come across any interesting articles, please feel free to share them on the chat.

Sure.

One other comment I wanted to come back on is -- I'm sure our audience and our panelists as well are very interested to hear about your China experience, right? Obviously, you spent many -- the last few years in China and many years in Asia. And obviously, China was the COVID epicenter. But in many ways, it's also been the first and the fastest market to recover. What are some of your perspectives and key learnings in your role, being based in China?

Yes. Thank you, En. I'm sure that this is a very important question that a lot of us have in mind. I actually realize, when I'm now in quarantine in Italy, how the pandemic is still so present in the rest of the world. But when I went back to China in February after the Chinese New Year, there was very little that we knew about the COVID-19 and also the situation and also the future. . So looking back now, I can really see how China demonstrate a lot of resilience. The lockdown was very short. It only last like 1 month. And in April, May, June, we started to recover, which is something quite difficult to believe when you are outside of China. But it was actually true. And by the end of June, we were back to normal. But I would say it wasn't really normal. We call it the new normal because there are a lot of things that we learned, a lot of things that changed during the COVID-19 pandemic, lockdown and also recovery that I really believe will stay with us maybe forever. So one is this digitalization that we are all experiencing. And sometimes, it's also tiring. But it's actually a very positive, I would say, even from a social and overall community perspective. Because with the digital platform that I saw Novartis really built in the prior years in China, all the employees were able to continue to work as normal. As a CFO, we did our closing with the [ IMI ] program, so working all virtually from home. But also, we were able to continue to ensure our products were available to our patients. . We continue with education to our customers through digital and digital platform. We were able to launch new products, so to bring innovation, have no break even during the pandemic by using really virtual solutions. So the importance of having invested in digital is absolutely critical. But I would say also the culture, because during the time, there was a lot of empowerment, a lot of leadership that had to be really taken from a country perspective and also from an employee perspective. Especially when facing some of these challenges, decision has to be taken. And so the empowerment that was built through the culture, I think, really helped. I would say, overall, it was really the importance of having this ecosystem, which is also something that Naina mentioned before. That really strengthen how cooperation can ensure sustainability, working together with the different players in the ecosystem. And in a way, also immunize the organization. So I mean, our priorities continue to stay the same: focus on patients, ensuring access, supply and expanding also the affordability, accessibility of our medicine, improving standard of care. And so we saw that this is actually possible even during difficult time like the pandemic. And I think it's very relevant in the context of ESG and this summit today.

Well, thank you, Federica. I noticed here that we just have one more question directed at you. It says, "I love the concept of CVO as a natural evolution of CFO. In your opinion, what additional education will be recommended to get -- in order to enable this evolution?" Maybe you can spend a minute on that.

Yes. Sure. So I would say, keep all the good things and good training and experience that, as a CFO, I think we have been adding as of today. But I think we need to expand our external focus and really have even a more deep enterprise mindset that encompass not just the financials and even the business partners or insights of business decision, on investment allocation, but really looking from external eyes. So looking from our stakeholders, our customers. So be more focused and also keep increasing the curiosity or ask the tough question. When taking decision, go beyond what is really numbers. There is also one very inspiring topic I read about the triple bottom line. So the triple bottom line of profit, planet and people. So that's probably what we will need to add to become a CVO.

Excellent. No, thank you for your sharing. And I am seeing that the chat is getting pretty active now and follow-up questions coming in. So keep them peppering in. I'm going to save some of them for the last part of the Q&A so you can hear all perspectives of speakers. But Federica, thank you for your learnings, and I'll move on to Jason. Jason Lange is the Executive Director in the Office of Best Practice Regulation in the Australian government, Department of the Prime Minister and the Cabinet. And we're very fortunate to have Jason join our panel today because, obviously, his perspectives from the regulatory or the policy side is very, very important and necessary as well as we talk about the enabling ecosystem that quite a few of our panelists have referred to. So Jason, a big welcome. And I wanted to start off by asking you, what is the role of impact measurement and analysis in helping governments make decisions? And I know that you're going to share some on your regulatory impact analysis, or RIA, so I'm very excited to learn more about that. But -- and specifically, how do you also look at the types of impacts? And in practice, how -- can you give us a couple of examples of how this works in practice? Over to you.

Thank you, En, and thank you, Novartis, for the invitation to speak today. Delighted to be joining you from Canberra. And good morning, good afternoon or good evening, depending on where you are right now. So regulatory impact analysis, what we call RIA, is a methodology for looking critically at what new decisions we're trying to achieve and to map out what our available options are supported by clear evidence. This helps the Australian government think beyond purely fiscal costs, beyond a perspective that only thinks about GDP and to widen our thinking to look at how business and citizens will benefit from or be impacted by decisions that government is about to make. So you can see on this slide here, the key RIA questions the Australian government requires be answered if a policy proposal may have significant impacts. And here, we're talking about both direct and indirect or second order effects. Australia has had RIA in some form or another as far back as 1986, and it's evolved over time to the point that we're now a leading OECD nation in terms of RIA maturity and sophistication. I'd like to talk a bit about what impact analysis is, or that question 4 that's on the slide. But I should make the point that you can't tackle one part of this in isolation from the rest of the framework. So you need to do a clear problem definition and really make the case for government intervention to be made before you can get to the impact analysis part of it. Next slide, thanks. So we don't do a RIA on every single decision. It's only those proposals we think will have a major effect on business or individuals that receive this additional level of attention. We do roughly 70 to 80 of these each year. Each of these are unique and separate RIA across pretty much any topic in any ministry that you can imagine. So what is impact? Well, first, we look at second -- we look at first, second and third round effects, if possible. And so perhaps think of it this way. We ask, if a decision is about to be taken, what are the flow-on effects on business, to individuals in the community that we could reasonably foreshadow and expect to see a point of policy decision? So we look at who is likely to be impacted by this upcoming decision and then try and work out how they might be impacted. And there's many different types of impact to consider. So there's social impacts. So these might be lives saved and hospitalizations avoided, public health and safety impacts, employment or labor market changes, maybe impacts on crime and security, changes in educational attainment or maybe access to justice. We look at competition impacts. These could be impacts on incumbent businesses, the entry of new players, the prices of goods and services, changes to the quality and variety of goods and services or maybe impacts on how the market operates. There's also a consideration of environmental impacts, so these might be on emissions, on air, water or soil quality, on resources, biodiversity, land use, waste management or maybe take-up of recycling. There's regulatory impacts, and I think these are pretty obvious. How much time does it take to fill in the form, apply for that license, read and understand the new requirements, or maybe the labor costs involved in having someone to now do a safety check in the factory. There's also distributional impacts there, so how do we expect to see those impacts apply to different groups in society. Are the impact homogenous? Are they the same across different cohorts? Do impacts differed by size of business, on its location in terms of urban or regional location, on the rich and the poor, on male versus female or perhaps on indigenous or nonindigenous groups. Next slide, thanks. So what we'll do is we take this example, where some women continue to drink alcohol while pregnant either knowingly or perhaps not realizing the potential risks this may involve. And this can result in babies suffering from fetal alcohol syndrome -- spectrum disorder, FASD, which is a range of physical, cognitive, behavioral and developmental difficulties that result from alcohol exposure during pregnancy. And FASD, as you know, has flow-on effects throughout the individuals' lives. So take the concept of impact analysis we've just talked about, and we'll look at the proposed changes to how alcohol is labeled in Australia. So the impact analysis considered the cost of government, to the health system, to the education system and criminal justice costs; the inability of individual to fully contribute to society, lost productivity, morbidity, premature mortality; associated, call it, longer-term welfare costs to the family unit and to the community more broadly; and of course, the impacts on the industry, should labeling changes be agreed by government. Industry costs were estimated to be very high if every product had to be pulled from shelves and relabeled instantly. But our analysis, and informed by consultation, showed that staged implementation over 2 to 3 years allowed existing stock to be depleted, and that brought the direct industry compliance costs quite down. And we're talking about a reduction from $191 million in costs, should labeling have to be changed overnight, down to only $13 million cost. So that's quite a sizable gap. And to this, we added a breakeven analysis to estimate how many cases of FASD needed to be avoided for warning labels to be worthwhile given the direct cost to industry. The Health Ministry in Australia estimated with very sound assumptions that only 13 mild cases of FASD needs to be avoided every year to produce a net benefit to society. That's only 13 women each year. Think of that in the context of over 300,000 births each year, that's 0.004% that needed to be influenced successfully with these laboring changes. If you're interested in how this was done, I encourage you to access the full impact analysis through the link on the slide that you can see. Next slide, thanks. So thank you for providing us this opportunity to present to you and talk about what we do. If Australia's RIA frameworks are of interest to any of you, I and my office will be more than happy to share our experience and expertise. In the meantime, you can access some more information about RIA and Australia through the links on the slide. Thank you for your attention, and back to you, En.

Thank you, Jason. It's great to see how progressive Australia is in terms of looking at impact, and particularly giving the regulatory and policy impetus, which I wish a lot of other governments adopt as well. So thank you for sharing that. I guess we have -- now we've come to about 10 more minutes left in our session, and I'm seeing a pretty active chat coming in with quite a few questions. So I wanted to ask all the panelists to join me for the last bit on Q&A, and I'll start reading out some of the questions.

There's one question on social value and ESG metrics and how that's factored into the target rate of returns and estimates of cost of capital in terms of making investment decisions. Do they price social investments higher than average? Is it intuitive or more precisely integrated? It's quite a tough question. Anyone who want to take this -- have a stab at this -- in answering this? I'm leaning towards Naina, maybe, to start some perspectives. Because dealing with a range of funders, from philanthropists all the way to investors, types of decisions on capital and cost of capital, whether you're prepared to set that trade-off in returns, I think, really varies with the type of funder. But I wanted to open up to the panel to chip in.

Sure, En. I'll start it off. So I think you're absolutely right that it depends on the type of capital that is being deployed. So obviously, when we are talking about philanthropic capital, the grant maker usually pays a lot more importance the social impact that is generated. In fact, grant capital often forms the what we would like to call in financial terms, the first loss capital or the capital that is actually best utilized towards higher risk, greater impact kind of investments. I do think, however, we are finding now more and more investors, in fact, looking at balancing their portfolio. So taking what is known as 100% approach in terms of balancing their portfolio with an impact versus financial return kind of balance or perspective, where they look at the trade-off between having a higher sort of immediate or higher, more short-term impact return versus taking a longer-term approach to the financial return. I think it's important to mention here, and I think I saw a number of questions in the chat, where -- if you do look at investing in more sustainable investments or investments that have a higher ranking as far as ESG is concerned, I think a lot of financial advisers will tell you now that returns are probably much better over the longer period than investing in nonESG-compliant products. And I'm sure Federica would have a point of view on that. But I think more and more investors as well as more and more CFOs are looking at how do you actually incorporate the value of their investments, not just in financial terms, but also in terms of the impact on community and the impact on planet.

Well, thank you, Naina. And I think that's very well responded. And I could also add in my comments as well as we're talking about ESG, particularly in the public markets because not all asset classes behave the same, part of the reason why there's so much momentum in the public markets behind ESG interest is specifically because there's been outperformance and more resilience in down markets. So absolutely. Any other panels you want to add on to that question? Okay. If not, I will move on to next question. How do you measure social value? Is this another SAP module? How do you build the system? Are we adding further sections to the chart of accounts posting debits and credits that you did not account for in the past? Perhaps I can direct this to Hyungguen. You might -- would you have any thoughts on this one, or Federica?

Let me briefly answer the question. Well, how do we measure SV is a really big question because we have to talk about principles, method, the quality of the criteria for the quality of data, et cetera. It's not another type of SAP. We actually have -- we developed our own system. It's called SUMS, social value management system. So it's a kind of platform that we communicate with each other, adding, uploading a formula and data, yes, to track progress, et cetera. So I would say, how do we actually measure SV with a big question. I can say, well, different steps and process we have to put together with different ideas and criteria, good practices, and et cetera. And in the end, why actually we are doing this is because we want to make contribution to making a new business language. Well, by this, what I mean is there's already a global trend actually we can see. The financial statement we use is not really enough to embrace the wider value of society, nonfinancial impact, in particular. So yes, this question, we ask ourselves quite often. How do we have to make better social value? Not sure if I answered the question, but that's it, yes.

Thank you, Hyungguen. Thanks for that. It's naturally a difficult question, but thanks for sharing your thoughts on this one. I have 2 other questions, I think, that directed at Federica. One is, do you have practical examples on how the new social environmental KPIs enter the CFO's decision-making process? And a related question on how you measure affordability in China.

Yes. So thank you for the question. We have 4 minutes to go. Yes. So actually, I mean, in terms of affordability, there are many ways that you can, of course, manage that. So it's not just pricing, but it's really looking at a more holistic approach of how you can make the standard of care accessible to patients. So product is one component, but there are many other ways and many other investment needs and unmet needs that we see in the China society, and especially now that you see all the efforts made in bringing China into really middle class. So I think that this is going to come also in the future, and affordability will be absolutely relevant. . In terms of the first question, what is really -- some of the really practical usage of this social measure. In my experience, I think it's starting to be considered at the beginning when we take decision. But at the moment, it's still probably more than after the fact. So it's once the business has been implemented, executed, and we look at ways to measure the social impact. So it's also -- and thank you for the question. It's also, I will say, my dream and my hope that one day, we can really bring some of these FES measure at the beginning of the business case assessment, of deals assessment and then follow through and measure them during the implementation. So that at least is my hope.

Thank you, Federica. And I guess, maybe with 2 minutes ago, so the final question to Jason, which is, what is the methodology and database behind RIA?

Yes. Thank you for the question. So the methodology is really just a general public policy impact analysis framework you'll find hundreds on the Internet from various leading schools of government. I'm not sure if the presenter can back go to the set of questions we asked, but these will be questions you would hope ministries and public servants answer in developing -- should government act on something. An issue has arisen, what's the rationale for government action? And an obvious part of that is who will be impacted and why? I'm not quite sure what a database means, but in terms of measurement and metrics, so we look at roughly 1,500 to 1,800 unique policy decisions every year the Australian government is about to make. And we think through, if that decision was taken, would that have a major effect on the community or the business. And we say, if it does, my office then says, this requires RIA. And if RIA is not done, and there's a series of transparent and negative effects that have on the ministry that doesn't do it. Since 2013. We've only had 3 items out of tens of thousands that have failed to do RIA. So it's very well adhered to in the Australian government. And again, not sure what database quite means. But if you look on our website, at ris -- ris.pmc.gov.au, every decision of government that requires a RIS is listed there alongside my office's assessment of the quality of that analysis. So it's a database in some form.

Excellent, Jason. Thank you. So I think with a couple of seconds left. I'd like to thank our panelists today for really sharing very, very interesting perspectives on impact measurement and valuation. We've heard from corporate funders and from government and policy, so it's a pretty well balanced discussion. And I guess with final minutes -- final seconds to spare, I'd like to just thank our panelists, once again, thank you all for such an interactive questions; and at the same time, do a plug-in that Novartis has an amazing virtual exhibition which all of you can attend. I think that there are 5 of them. There's one that's focused on awareness building; one focused science and methodology; one in capacities; another one on shaping standards, as we discussed in this panel as well; and a fifth session on practitioners corner. So by all means, please stay on for a very exciting rest of the program, and I wish you all a wonderful day ahead and a big thank you to all our panelists. Back to you, Sonja.

Well, thank you, really, for this first session on measuring and valuing impact. This was excellent. Thank you so very much to all the speakers. Thank you, En, for leading us through this exciting debate. With that, we do enter a short break that I encourage the audience to use for the virtual exhibition and to spend some time in the virtual coffee corners that will be moderated so that you have people to exchange with. So we come back here to session 2 in 20 minutes' time. And the session 2 is called Reimagining Business. So see you soon. Bye.

Thanks, everyone. See you shortly. [Break]

Hello, everyone. Welcome to this exciting session on the future of integrated reporting. We're really glad you've joined us here today. We have an amazing group of speakers from around the world. And for those of you who joined for the morning events, you heard about what it means to reimagine business and how to craft social and environmental strategies within a company. And today, we're going to talk about what that means to report on social and environmental performance alongside integrated with financial performance, all tied up in a little bow. So what do we mean? For those of you who are new to the concept of integrated reporting on the line, it's focused on full value creation over time and providing a concise communication of how an organization strategy, governance, performance, and prospects lead to the creation of value in the short, medium and long term. My name is Amanda Feldman. I serve on the Novartis Impact Valuation Advisory Council, as many of the moderators you've listened to today. And with my experience with the Impact Management Project and UNDP's SDG impact initiative, it's clear that we're getting broader in the world of ESG and impact measurement and management, both on what good practice looks like as well as what good performance looks like. So it's a privilege to see that all coming together today with Carrie, Tjeerd, Kay and Bob, who you'll meet shortly. Please provide questions and comments in the chat. We really want to hear from you. I'm going to introduce each of the speakers for a short summary of their experience and insight about integrated reporting, and then we'll open it out to a discussion amongst the panelists. So first, I'd like to introduce Carrie Scott. Carrie has been with Novartis since 2007, and she leads the newly formed ESG management office. Carrie, integrated reporting doesn't happen overnight. When is the first time you heard about integrated reporting? And where was Novartis on this journey?

Thank you, Amanda, and hello, everyone. Thank you for having me. It's a pleasure to kick off this panel. And I am very happy to speak before all of the experts on integrated reporting. I'd like to share more of my practitioners' journey to get to integrated reporting. My name is Carrie Scott. And I -- as Amanda mentioned, I recently took over the new role at Novartis as head of our newly created ESG management office in corporate strategy. Most recently, I was in -- looking after the corporate brand and reputation management team, including responsibility for our corporate and ESG reporting. I've been leading the Novartis annual report and our corporate responsibility and ESG report for more than 10 years, actually. And earlier this year, we got the green light to go for integrated reporting, which we're all quite excited about. And as I mentioned, I have a new role. And a couple of weeks ago, I was packing up some boxes to move desks for my new job in the strategy team, whenever we can move back into desk, that is, and I ran across an old printout of a presentation I made a while ago on this topic. And the cover page of this old PowerPoint deck said, integrated reporting, our 3-year journey, and it was a proposal, and it was dated 2010. And just earlier this year, we got the proposal -- we got the go ahead to go forward. Now we take reporting quite seriously at Novartis. Since 2000, we've had a corporate responsibility chapter in the annual report. We've done the materiality work since the early 2000s that our CR Report has won awards we didn't even apply for. PwC has audited our nonfinancials for years and Sonja has pioneered work on impact evaluation. We're not new reporters by any means. And so you might be thinking the same as me, why did it take 10 years? What is wrong with her? How did it take so long? And what's interesting is that now that we have the green light from all of the Board and the executive committee, the organization can't do this fast enough. It's like it's an overnight success that took more than 10 years in the making. And there are 2 key learnings I wanted to kick off the panel with today, that me and my team have taken on in the past few years. The first is that it's very important to catalyze a discussion on holistic value creation and not necessarily an integrated report. The minute it's about the report, it's about the communication process. It's about the pages and what it looks like and who can be on what page? And you missed the critical conversations about how you actually create holistic long-term value. So we've all heard that phrase, right? Before you have an integrated report, you have to have integrated thinking. And so that's where we started pivoting, and we started having those conversations with loads of group. We have to have quick -- good resilience here. And we have those conversations, more about the strategy of value creation and less about the report on value creation. So once our new CEO then came and he had the fifth pillar as the build trust with society, we were immediately then on that path on how we report against that. The second learning I wanted to share here at the beginning of the session is that baby steps are good. There's naturally some tension in organizations around regulatory filing document. And it didn't really help that we were getting awards that we didn't even apply for sustainability reporting. So when we were shopping around these bigger ideas, it was very natural for people to say, as my grandmother would, who's from the southern part of the U.S., if it ain't broke, don't fix it. If it's not something wrong here, why are you going in this direction when we don't have to? That's a natural tendency. And I get it. It's very natural. But we did start making more baby steps. So several years ago, we started introducing, not all of the elements of the integrated reporting frameworks, but some of them that really made sense, and we built that over time. In fact, even a few years ago, a couple of groups called to interview us on our standard -- gold standard integrated report, which, of course, we refused because we didn't feel like it was really a gold standard integrated report. However, those baby steps helped us get to the moment that we are today. So those are the 2 things, Amanda, I wanted to share on the practitioners' journey, which is really 2 key learnings for us is catalyzing that discussion on holistic value creation and being okay with small steps to get there. Amanda?

Thank you so much, Carrie. And really clear on -- summary of the journey you've been on and will continue to lead at Novartis. I'm now going to remind everyone who's listening to please drop questions about what Carrie said, ideas, comments in the chat. And then hand it over now to Tjeerd Krumpelman. He's the Global Head of Business Advisory Reporting and Engagement at ABN AMRO. And after 20-plus years in banking, Tjeerd's now responsible for exactly what Carrie said that mix of integrated thinking and reporting. So Tjeerd, over to you. You've made an integrated reporting a reality at ABN AMRO. What does that all look like behind the scenes?

Thanks, Amanda, and thanks, Sonja and all the other people at Novartis for hosting this session and for inviting us to share our stories and our experiences, maybe also some of our challenges in the journey. So when we started this journey of nonfinancial prefinancial integrated reporting, I think back in 2013, 2014, we made our first steps, and we quickly found that the debate between integrated thinking and integrated reporting and whatever comes first that was a real lively debate. And I know that the textbooks will tell you -- will probably tell you that you need to have some level of integrated thinking in order to produce any decent integrated report. And I think it's fair to say that in our case, we started on the reporting side. We agree that we would do at first very serious attempt to really produce a decent integrated report, but it was a first attempt. That was our 2015 report. And we soon found the challenges and the debates around this report to be really valuable because they force us to ask questions like what is really the value that we create? What is truly material to our company? What is relevant to our strategy? How is this all connected? What are the real metrics and KPIs that we are developing or producing value or creating impact on? And all these questions kind of forced us into an integrated thinking mode. And that was a real interesting journey. And we're still on that journey. And along the way, we found that we needed different types of reports for different stakeholders. There were different demands. The investor demand is much different than the NGO or client demand in terms of reporting and there's several topics. There are so many topics that we need to disclose or -- that we want to disclose on externally. So what we found is that we wanted to add multiple reports from multiple disclosures to our reporting suite. And that's when at about the same time, Accountancy Europe developed a paper, it's called the Core & More approach. And that, for us, seemed to be really helpful. So what we do since 2017 is we have a core report that is our integrated report. That's where all information comes together. It's very concise. It's based on the principles of integrated reporting and it was one of the first reports in the world to get assurance cover-to-cover based on the IR principles. But next to this core report, we also have several more reports. We produced a separate human rights report. Since 2 years, we have a separate impact report. And even our financial annual report is actually a more report. As a bank, we have to do very many -- a large part of mandatory disclosures, Pillar 3 disclosures, all kinds of disclosures that are relevant to certain groups of stakeholders. And with this Core & More approach, we were able to differentiate between those stakeholders. So that's been really helpful. The assurance journey has been helpful as well. It's supported us in our ambition to improve year-on-year and to improve the process of reporting as well, the more technical process around data and the reliability of data. And finally, I would say that our ambition going forward is to continuously improve. So this -- the topic of this session is around the future of integrated reporting. And it was already described by Carrie as a journey, maybe a 10-year journey or a 3-year journey. But it's -- in my view, it's a never-ending journey. You would -- we would like to strive for continuous improvement year-on-year, listening to our stakeholders and seeing how we can align new reporting methods going forward to the next steps in our reporting journey. And I would also say or like to add, enjoy the journey. It's really fun, and you can benefit from a business perspective as well. If you really use reporting as a disciplining tool, as a management tool within your company, then integrated reporting, impact reporting, human rights reporting all those types of reporting can be really valuable for that part of the business as well. So I would like to limit my introduction to that. I hand it back to Amanda to introduce the other speakers as well. Thank you for now.

Thank you, Tjeerd. And in the introductory wisdom, you answered one of the first questions from the audience of around the order here, integrated thinking supports integrated reporting, but to your point, integrated reporting can really support and drive integrated thinking in the company. So [ Brent, ] thank you for that question. I'm now going to the pass the virtual mic over to Kay Petrisor, he's with the WifOR Institute, which is an independent economic research institute focused on health and impact valuation. And he's been working -- partnering with Novartis for many years. So Kay, I mean, integrated reporting relies on some judgment about materiality, for example, which Tjeerd mentioned. And there are some tools out there to support it like scenario planning and deciding on what needs to be measured and managed in an integrated way. Over to you for an introduction to your work. And a question of, do things need to be more standardized to make sure we understand how impact -- how integrated reports are being crafted? And where do you see this field moving?

Okay. Thank you really much, Amanda. And also thank you, Carrie and Scott (sic) [ Tjeerd ], for your great insight so far. So it's a pleasure to present some results and insights of the scenario analysis that we have conducted with Novartis, with Novartis' internal experts as well as external experts about the developments of financial reporting within the next 10 years. I have 2 questions that I would like to answer at today's session. Number one is, why did we conduct the scenario analysis? So I would see this as a bridge between materiality assessment and scenario analysis. And second, what are the major developments? And I think we have some valuable insights for the today's discussion. So as you all know, materiality assessment is an important approach to better understand how internal and external stakeholders perceive impact from Novartis or impact from other companies, financial and nonfinancial. But we have to say that this is mainly retrospective. So in addition to that, the aim of the scenario analysis was to identify developments and requirements of financial reporting within the next 10 years to identify threats and opportunities and, of course, to consequently handle the increasing dynamics of change. The major developments and topics within the next 10 years are harmonization of standards, due diligence legislation and monitoring technology, Big Data, Big Data in context of ESG and Big Data in context of unstructured data. And of course, shifting stakeholder demand. I would say that especially within the next 4 to 5 years, we must see this period in the context of standardization versus fragmentation. So what does that mean? From a policy perspective, we will sooner or later have the supply chain law or we will have an FRD revision, and we hopefully have harmonization of standards by 2024, maybe an IFRS standard or an European Union standard. But something is that I would like to highlight, it's also really important for the discussion today is that external pressures anyway from investors will come before standardization, and this is due to the fact that there is a rising demand of ESG investments. There are more investments moving to ESG. And consequently, there is rising demand on Big Data analytics for ESG investment. Our recommendation is for action out of this project that, therefore, companies must be proactive with their data and ESG reporting. So that means companies should harmonize internal data to close disconnect between externally and internally communicated data. This is something which is really important, I would say. In addition to that, we see the development that there are some impact valuation initiatives, an example, the value balancing alliance, and we see them as a driver, an enabler to fasten the process of standardization, especially when we're talking about including impact valuation. So we believe that they could adapt -- they could be adopted by authorities or foundations, for instance, like IFRS and maybe there will be, by the middle of the century, IFRS 2.0 or OSG global report. In addition to that, another development is technologies for due diligence monitoring. There will be more investments in technology to facilitate due diligence monitoring; an example, sensoring technology. I believe that also -- we believe that also blockchain is developed in a manner that makes it usable for due diligence reporting. We see supply chain technology has been identified. I must highlight this again as the greatest impact on future supply chain management. And another important topic in the future is the Big Data analytics of unstructured data. Big Data analytics of unstructured data will be used extensively to widen the types and volumes of data, especially accessible for analysis of financial, but I would say, especially for nonfinancial data within a company. But here, I have to highlight that it seems quite far away because unstructured data requires time, money and mindset. And yes, as Carrie mentioned at the beginning, they are fine with taking some baby steps. And I'm not sure if this is a baby step at the moment. So that brings me to the end of my presentation. And in conclusion, I would like to give you 3 takeaways. Number one is major developments are harmonization of standards, due diligence legislation, Big Data and, of course, shifting stakeholder demand. Second is the longer it takes to have international standards, even on a European level, the higher is the impact of fragmentation. And I see this as a risk for companies because investors will use different and independent ESG metrics and measurements. And yes, companies have to find a way to report the right internal data. And the third point is that we strongly believe that the initiatives like the value balancing alliance might fasten the process of standardization, context of impact valuation, as they could be adopted by authorities and foundations like the IFRS. Thank you for your attention so far. And I would like to hand over to Bob and you, Amanda. Thank you.

Thank you, Kay. Thank you for that. Very helpful summary. Over to all Bob Eccles, who on the screen here is affiliated as Saïd Business School with the University of Oxford. But I know that's one of your many academic affiliations, Bob, and you focus on research around ESG and corporate purpose. So you've been around the integrated reporting block a few times. Is this really becoming a norm? Are integrated reports credible these days or what do we need to make sure they are? And if you want to throw in any thoughts on materiality, we have a question from the audience, so feel free? So -- and again, any of your current thinking about what -- how materiality will evolve in this process?

So Amanda, just let me make sure I understand what you said. I've been around the block a few times. So you're saying I'm older. Is that what you mean, Amanda?