Zero to hero?

Net-zero emissions initiatives have gained traction in recent years, particularly in the pharmaceutical industry.

Pharma has traditionally lagged other industries in emissions commitments, but market pressures from customers and regulators have contributed to shifting emissions targets into focus.

Thirteen of the top 20 pharma companies by revenue have committed to net zero, and among these, over half made their commitments in the past three years.

Scope 3 covers a wide range of emissions that are not directly owned or controlled by a pharma company, both upstream (i.e., pre-production, such as emissions from suppliers) or downstream (i.e., post-production, such as emissions from the disposal of a company’s products) along the value chain.

In line with the growing focus on the connection between climate and health, stakeholders in the healthcare industry are increasingly seeking to decarbonise.

Reducing emissions is becoming a core priority of many organisations that seek to serve as stewards of human health.

But Scope 3 emissions reductions are becoming not only an environmental imperative, but a strategic one as well.

Pharma companies that implement emissions reduction initiatives in the near term will likely be able to recognise commercial and operational co-benefits that drive competitive advantage.

In the pharmaceutical industry, Scope 3 emissions are about five times greater than Scopes 1 and 2 combined and comprise 80%-90% of total emissions.

However, tackling Scope 3 emissions has been a complex undertaking; pharma companies have historically been hesitant to focus efforts on reducing Scope 3 emissions due to their lack of visibility and direct control.

In recent years, Scope 3 emissions reductions have shifted into focus, partially in response to regulatory and market access-based pressures.

The number of pharmaceuticals, biotechnology and life sciences companies making Science Based Targets initiative (SBTi) commitments (i.e., committing to reduce emissions or setting specific reduction targets) has increased exponentially over the past five years, from one company – Novo Nordisk – in 2018 to over 180 companies by the end of 2023.

While these commitments indicate a positive trend, only a fraction of these companies have made net-zero commitments validated by SBTi, which require companies to explicitly identify Scope 3 emissions hotspots and to commit to specific near-term and long-term reductions.

Without validated targets, broader emissions commitments are unlikely to drive substantial change in Scope 3 emissions.

Beyond the environmental imperative to reduce Scope 3 emissions, there is also a strategic imperative – pharma companies that undertake efforts to reduce Scope 3 emissions can receive a number of benefits that drive value for their business.

In order to reduce upstream and downstream emissions, pharma companies need greater visibility into their supply chains.

With greater oversight comes a co-benefit of improving operational efficiency, as pharma companies are able to obtain supply chain data more easily and make more informed operational decisions.

A related co-benefit of more supply chain visibility is greater oversight of supplier behaviours; with more insight into suppliers’ activities, pharma companies are better able to partner with them and hold them accountable for their actions.

Developing products and medical devices that have a reduced environmental impact requires investments that may lead to product differentiation.

An example of this comes from Novartis’ Omnitrope SurePal pen injector, which uses a case to hold drug cartridges. Novartis redesigned the case to use recycled polypropylene and to enable patients to see the contents without opening the case.

This product change reduces the carbon footprint of the product by about 75% while improving the user experience – a change that likely would not have been prompted without the initial Scope 3 reduction imperative.

In this way, Scope 3 reduction efforts have a strong potential to drive product innovation and differentiation.

As governments and private companies continue to encourage sustainability, there is increasing potential for better market access and pricing for lower-emission drugs.
For example, the Nordic Pharmaceutical Forum, which represents Denmark, Finland, Iceland, Norway and Sweden, has established a joint tender agreement, which provides incentives such as price premiums to drug manufacturers that can meet stringent environmental criteria.

Indeed, 28 such criteria have included whether the bidder is pursuing zero carbon emissions and clean wastewater at its own and its sub-suppliers’ production sites, and whether the bidder is making an effort to reduce greenhouse gas emissions from transport.

The Nordic region has long had a high degree of influence on European policymaking, implying that such ESG requirements for pharmaceutical procurement are likely to influence how other countries will develop their own procurement systems in the coming years.

Reducing Scope 3 emissions will position pharma companies well to take advantage of this potential co-benefit.

A pharma company can derive marketing and branding benefits from reducing its emissions.

For example, while climate-friendly inhalers are not yet commercialised, pharma companies like GSK have issued press releases announcing their initiatives to reduce environmental impact and signalling to the market their commitment to sustainability.

Further, Sanofi’s 2023 Road to Net Zero Factsheet acknowledges that, ‘environmental awareness has significantly increased among customers, investors, and society in general. Not complying with sustainability expectations and requirements bears severe financial and reputational risks for Sanofi.’

So long as companies avoid greenwashing, being able to communicate the efforts taken to reduce Scope 3 emissions is likely to positively impact a pharma company’s image among patients, prescribers and the broader market.

There are a variety of steps pharma companies can take to succeed in their plans to reduce Scope 3 emissions and to derive the associated co-benefits –

• Develop a clear strategic framework for where the biggest decarbonisation impacts can be realised; identify areas that strike a balance between the absolute size of a potential reduction and the feasibility of achieving the reduction
• Bring decarbonisation considerations upstream, starting at the product development stage; the earlier in the value chain changes are implemented, the bigger the potential impact (e.g., design products that will produce lower future Scope 3 emissions)
• Collaborate with other pharma companies to drive changes in supplier behaviour more effectively
• Embed supplier governance expectations across all functions within the firm, with clearly defined key performance indicators and expectations.

In the coming years, reducing Scope 3 emissions will become more than a requirement for pharma companies — it will become a strategic imperative, driven by co-benefits such as supply chain visibility, product differentiation, and potential for preferred market access and pricing.

In the next decade, we anticipate that successful pharmaceutical companies will be those that make concerted efforts to reduce their Scope 3 emissions.

Embarking on a Scope 3 emissions reduction journey requires a strategy that extends beyond environmental considerations. Companies must fully embed their net-zero approaches within overall business strategy and pursue alignment across the organisation.

Verena Ahnert is a Partner at L.E.K. Consulting. Go to lek.com