Novartis ESG Update - October 27, 2021 (PDF 0.5 MB)

Q3 2021 ESG Update for investors and analysts

October 27, 2021

Dear investors and analysts,

In our Q3 ESG update, we reflect on our recent annual ESG Event hosted by our CEO, Vas Narasimhan and look at some of our updates during the quarter. As always, we include 'Top 10 ESG Questions' from the quarter with our corresponding responses.

We are grateful for your continued engagement and discussion on all ESG-related topics. We believe shareholder engagement is the optimal way to ensure a thorough understanding of our efforts and results on ESG.

We hope this update is of interest and welcome your feedback.

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Contents
Click to go to section
ESG Event 2021 .............................................................................................................................................................	2
Reflections on Materiality Assessment 2021 ..................................................................................................................	6
Looking Ahead: Governance Roadshow, Impact Summit ..............................................................................................	6
COVID-19 Update ...........................................................................................................................................................	7

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ESG Event 2021

On September 30, 2021, Novartis held its 8th annual ESG event which included several small group meetings following the main plenary session. We would like to thank all the participants for taking the time to attend this event.

You may view the webcast of the presentation here, and the presentation deck can be accessed here.

In our discussions with asset managers, stewardship teams and sell-side analysts, we noted three general (not Novartis-specific) themes related to ESG investing that formed the basis of our content for the event. These were:

1. Can ESG investing really deliver 'Alpha'?
2. Can a focus on ESG by companies and institutions who invest in them, deliver 'Impact'?
3. With purpose and profitability being so complex to operationalize, can companies do both successfully?

To summarize our views, we share our thoughts on these questions:

Can ESG investing really deliver 'Alpha'?

For Novartis, managing ESG is a high priority because it reduces risk, adds impact and value and it is the right thing to do (exhibit 1 below)

A correlation between strong ESG practices and reduction of risks is well accepted across industries. There is also growing evidence which suggests that a focus on material factors provides superior financial returns (see here). Possible reasons may include reducing risks, attracting and inspiring employees, and driving organizational innovation. Management of material ESG factors can also serve as a proxy for good leadership.

Feedback we hear from you, our investors has cited difficulty in assessing correlation between ESG and alpha, include the 'bluntness' of ESG performance indices, of which there are many and which are not industry-specific. This highlights the ongoing need for regular engagement between investors and companies to assess company ESG performance.

Effectively managing ESG:

1. Reduces risk

2. Adds impact/value

3. Right thing to do

Companies with superior adherence to material ESG factors provide superior financial returns1

Potentially reducing risks, inspiring employees, attracting talent and driving innovation

1. Serafeim, George et al. (2015): Corporate Sustainability: First evidence on materiality. HBS Working Paper 15-073.

Exhibit 1 from ESG Event deck

2

Can a focus on ESG by companies and institutions who invest in them, deliver 'Impact'?

The ultimate aim of ESG is creating a lasting 'Impact'

"ESG funds are measured against benchmarks for financial returns; they are not measured on the impact they deliver"

Exhibit 2 from ESG Event deck

'Impact' is change beyond what would have happened regardless and it needs to be intentional and measurable. Currently, impact measurement is still in its nascent phase, as indicated by recent research herefrom the Center for Sustainable Finance and Private Wealth.

Our recent efforts at Novartis include our 2020 sustainability-linkedbond (SLB), our emerging growth brands and our Sub-Saharanstrategy focused on access and innovation. These initiatives were intentional, created to have measurable KPIs and are making an impact on society, furthering access to innovative medicines.

Investors (exhibit 2 above) can contribute with a company to ensure impact made. Mechanisms that investors could use include deploying sustainable and long-term capital allocation strategies, addressing indirect impacts, and engaging directly with corporates. Capital allocation by removing corporates from portfolios may actually not have the desired impact as the investor loses his seat at the table to influence change. Therefore, engagement remains the main tool for shareholders, who can influence corporates through active communications on both short and long-term efforts.

Select Impact initiatives

For the past six years, Novartis has been exploring and evaluating impact valuation. Understanding and measuring what matters to our stakeholders is essential to us as we seek to improve and extend people's lives.

Select initiatives:

• We delivered a 5-year forecast of the social impact of Adakveo
• Partnership with Saudi Arabia to deliver an impact estimate to national 2030 targets
• Engagement with stakeholders at the Global Solutions Summit
• Annual Impact Summit (2021 December event will focus on impact valuation methods)
• We aim to publish our White Paper on the health utility of income and measure the social impact of Leqvio (Inclisiran) for cardiovascular disease in 10+ countries.

Impact Partnerships:

• Novartis participates in several initiatives and platforms. We were a founding member of the 'Value Balancing Alliance' (VBA), a non-profit organization rethinking the value contribution of business to society, the economy and the environment, and developing a standard for impact measurement and valuation.
• The VBA is supported by Deloitte, EY, KPMG, PwC, the Organization for Economic Co- operation and Development, European Union commission, leading universities and stakeholders from government, civil society and standard-setting organizations.

We appreciate it is difficult to measure impact Any thoughts or ideas you have on the subject would be valuable feedback.

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With purpose	Novartis believes key to success in operationalizing profit with purpose is integrating ESG
and profitability	considerations in normal business activities. Our vision is to create long-term stakeholder
being so	value (exhibit 3 below).
complex to
operationalize,	An example of our efforts is our Sub-Saharan Africa strategy, which has successfully
can companies	prioritized patient reach to drive access, since it was launched in 2019. Our innovative and
do both	sustainable business model has remained profitable and continues to deliver on access to
successfully?	medicine.
	ESG is integrated into the Novartis strategy and is critical to delivering
	on our purpose
	Delivering on stated purpose whilst
	balancing and integrating different
	components of capital1 to create
	stakeholder value

1. Colin Mayer, Nov 2018, Prosperity 1st edition
2. Source: International Integrated Reporting Council, Integrated Reporting Framework

Exhibit 3 from ESG Event deck

Our Materiality assessment 2021 has clearly demonstrated what the most important priorities are for our stakeholders. These are listed below in exhibit 4 and are integrated into the Novartis strategy and our ESG targets.

We use stakeholder materiality analyses to determine our ESG focus and priorities

Where to play | our focus

Priorities ranked highest by external/ internal stakeholders in materiality analysis 2021 (shaded are priorities listed

highest)
Patient health		Access to
and safety		healthcare
Innovation		Ethical
		business
		practices
Human capital		Good
		governance
Sustainable		Environmental
financial		sustainability
performance

How to win | our ESG targets (select)

100% of	Sustainability-	Invest $100m
launches with	linked bond	to advance R&D
global access	2025 patient	of next-generation
strategy annually	access targets	anti-malarials by 2023

NEW	Gender	NEW
100% of Ph3	balance	Net zero by 2040
studies with US	in management	Carbon (across value
participation to	by 2023	chain), plastic and
have diversity &		water neutrality
inclusion principles		by 2030
annually

Exhibit 4 from ESG Event deck

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Novartis has launched nearly 250 Emerging Market Brands (EMBs) (exhibit 5) in Low and Middle-income countries (LMICs). Our EMBs have been an effective approach, helping

us to expand access to more patients globally in a financially sustainable way. We have also developed other sustainable business models such as our 'Healthy Family programs'.

Novartis Access Principles in practice: Emerging Market Brands

Our Emerging Market Brands improve speed to market of innovative brands for LMICs, patient reach & business model sustainability. Examples are provided below.

	Business sustainable		EMB strategy for all		Launch time lag in
	Tiered Pricing Framework		our major brands		LMICs <12mos
	100% of launches								vs first launch
						Brand	in Europe
	have global access strategy
	(incl. developed countries								12 months
	& LMICs)
								10 months
	3-year CAGR 2017-20
								7 months
	Patient reach +52%
	Sales USD +55.5%								7 months
									6 months
									5 months
									0 month
									-1 month1
							Previous time-lag
							24-48 months between launch in
							developed economies vs. LMICs

Example: Entresto® addresses a major global health concern in LMICs

Globally: 26m people affected by heart failure

LMICs: Increasing burden driven by surge in prevalence of etiological factors (hypertension, diabetes, obesity, lifestyle changes, etc.)

#1 growth driver in LMICs through EMBs

2020 Entresto® in LMICs

• Entresto® EMBs in 42 countries, contributing to 57% of Entresto® patient reach in LMICs
• Patient reach: ~470k, +47% vs. PY
• Sales: +50% vs. PY

Exhibit 5 from ESG Event deck

Other key announcements:

• Diversity in clinical trials: we have committed to including diversity and inclusion principles in 100% of our Phase 3 studies with US country participation starting in the second half of 2021, with the goal to increase and embed this evaluation across our global trials. More details arehere.
• Environmental sustainability: we announced our ambition to achieving net-zero across our value chain by 2040. Given that our scope 3 emissions remain a challenge for us (as with most pharmaceutical companies), our efforts will be focused on this area. Our plans to achieve this goal include:
• • Commitment to Science-based targets
  • Set our expectations and provide support to our suppliers on their environmental footprint
  • Introduce environmental requirements in all our supplier contracts
  • Developing innovative and low-carbon footprint products such as our Breezhaler

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