At the Glasgow Conference of Parties (COP26) in November 2021, governments and the private sector sought to put the global economy on the path to net-zero carbon emissions. Governments made promises across sectors, with 46 countries committed to developing low-carbon healthcare systems. Verena Ahnert and Andre Valente, Partners at L.E.K. Consulting, analyse the growing interest in sustainability within the pharmaceutical industry, their low carbon pledges and the impact on contract manufacturers and supply chains.
Sustainability in the making
A combination of shareholder and stakeholder pressure, reputational risk and basic economics is driving the pharmaceutical sector inexorably towards addressing sustainability concerns.
‘There’s increasing attention on sustainability on earnings calls,’ said Ahnert. ‘And the pharmaceutical industry has not necessarily been blessed with the best reputation historically, so tackling sustainability goes some way towards improving their standing with both the public and investors.’
Valente agrees and sees the pressure also building in the private markets. ‘Investors in the public markets are more thoroughly scrutinising the ESG track record of the businesses in which they invest,’ he said. ‘But we’re also seeing more and more private equity funds with ESG investment criteria, and that’s a significant development in pushing the ESG agenda down through the economy.’
There’s also the growing clamour from internal stakeholders for companies to improve their sustainability profiles as the workforce becomes better attuned to issues around climate change, social responsibility and governance.
‘ESG credentials are of growing importance when it comes to staff motivation and engagement for all companies,’ said Ahnert. ‘You can imagine the pharmaceuticals are also being asked the same questions.’
It all adds up to pharma companies, particularly large pharma, recently making great strides on sustainability, according to Ahnert. ‘It is clear that ESG matters are increasingly perceived as fundamental to shareholder value and long-term success,’ she said. ‘Many have already made carbon neutrality and net zero pledges, some of them for as early as the next decade’.
Commitments to net zero cover Scope 3 greenhouse gas (GHG) emissions, ie those in the companies’ value chain not emitted from assets directly owned or controlled by them, such as those associated with purchased goods and services.
An analysis of five top pharmas showed that Scope 3 emissions accounted for over 80% of the companies’ total GHG emissions in 2020 (see Figure One). Any increased emphasis by pharmas on controlling emissions will inevitably put pressure on suppliers, including contract manufacturing organisations (CMOs) and contract development and manufacturing organisations (CDMOs).
‘It’s relatively early days to judge the extent of the impact on contract manufacturers from pharma’s Scope 3 announcements,’ said Valente. ‘But it will become an increasingly important factor to build into business plans.’
Net-zero and beyond
China, the country with the largest CO2 emission volume in the world, demonstrates strong determination to reduce its carbon emissions. In its fourteenth Five-Year Plan, it sets the goal of ‘reaching peak emission by 2030 and carbon neutrality by 2060’, acting as a guiding principle at the national level.
As the largest active pharmaceutical ingredient (API) producer and exporter globally, China has highlighted the objective to ‘develop green and low carbon pharmaceutical value chains’, even though the Chinese government has not yet set specific goals around Scope 3 emissions for the pharmaceutical industry. Establishing high-standard, centralized API production bases; developing and using green technology; setting waste management standards; developing plans for reducing carbon emissions; and promoting Environmental, Health and Safety (EHS) systems are listed as the key initiatives (see Figure Two).
Pharmas have also made broader sustainability commitments beyond GHG emissions, with key themes based around waste reduction, reduction in water usage and reduced API discharge into water streams.
For example, GSK is pledging water neutrality for key suppliers in water-stressed regions and a 10% waste reduction from the supply chain by 2030, while MSD is planning for 90% of its high-impact suppliers to define and work towards water use reduction targets (see Figure Three).
Based on global initiatives, multinational pharmas such as GSK, Novartis and Novo Nordisk have also committed to either high-level or specific environmental targets for China. In some cases, commitments have been in place for years. For example, Novo Nordisk’s Tianjin plant has become the lowest energy-consumption plant among all Novo Nordisk’s manufacturing operations.
‘Our production sites in China plan to save 5% of electricity and 3% of water compared to last year. We will conduct a diagnostic at each site to determine specific implementation plans for water and electricity savings. All plants follow a ‘zero landfill’ goal, ensuring that waste generated at the plant is recycled rather than disposed of in a landfill.’ ‒ GSK China.
Two sides of the same coin
Pharma vs CMO/CDMO sustainability dynamics
Below, we explore how pharmas’ increasing attention to the environmental impact of their supply chains creates action points for contract manufacturers (CMOs and CDMOs), and what these organisations should keep in mind when preparing for change. (See note 1)
Pharma companies have long monitored the regulatory compliance of their suppliers, and environmental performance is being added to the list of demands, with pharmas setting expectations in their supplier codes of conduct. The level of pressure which pharmas place on suppliers varies by size and geography and is particularly pronounced among US and European companies. Asian pharmas selling predominately into local markets, however, are expected to place less emphasis on the environmental performance of their suppliers.
But what are the tangible implications when supply chains are vast and complex and suppliers and pharmas alike are navigating new territory?
Suppliers will have to navigate differing levels of ambition among their pharma customers and varying time frames for achieving targets. This ranges, for instance, from companies which have just started collecting data about Scope 3 emissions to those that have issued firm commitments to require the use of renewable energy among all suppliers by 2030. Immediate scrutiny and action are directed at high-risk suppliers, such as those accounting for a larger proportion of spend and/or emissions.
While technology, track record, capacity and cost are still the most important criteria for selecting CMOs/CDMOs, demonstrating progress in reducing environmental footprint is becoming increasingly important, and CMOs/CDMOs will have to be mindful of future performance requirements. This is particularly relevant for new capacity currently being added by CMOs/CDMOs, and which will become operational in the next 18 to 36 months.
‘Engaging with suppliers is a multi-step process, comprised of informing suppliers that they are expected to act on their environmental footprint, getting them to set targets and create action plans, and then monitoring their progress. Pharma companies are at various stages in this process, but the industry as a whole understands that it needs to move towards reducing the environmental impact of its suppliers …. The inclusion of environmental performance as a criterion is new but will become more important as the industry matures and sets targets for its footprint across the value chain.’ ‒ HSE and sustainability expert at a leading pharmaceutical company
Data collection and target setting
As supplier sustainability moves into focus for pharmas, CMOs/CDMOs must act fast, and they should begin by gathering and analysing data regarding their environmental footprint.
CMOs/CDMOs should use this data to identify issues on which they can have the most impact and which are most relevant to stakeholders, such as reducing water consumption in water-stressed areas.
An analysis of leading CMOs/CDMOs (see note 2) identified five key themes of initiatives, data collection and targets — GHG emissions and energy efficiency; water intensity of production; pharmaceuticals in the environment and API discharges; solid waste; and environmental expectations in supplier codes of conduct (see Figure four). (See note 3)
These align well with the environmental commitments published by leading pharma companies (see Figure Three).
Greenhouse gas emissions and energy efficiency
Given the share of Scope 3 emissions of pharmas’ total emissions and near-term emissions reduction targets, CMOs/CDMOs will face the heat to reduce their emissions fast.
They will have to choose between actual emission reductions (such as through the increased use of renewable energy) and carbon offsets, with pharma customers — especially those with science-based targets — favouring the former.
Science-based targets allow for very limited use of offsets, which are verified by the Science Based Targets Initiative (SBTi) and are aligned with the sector decarbonisation pathways set out by the SBTi. (See note 4) For instance, a major pharma company’s science-based target requires a 35% reduction in absolute emissions across the value chain without using carbon offsets.
Large CMOs/CDMOs will likely face pressure to set their own science-based targets.
‘The pace of action required from suppliers will accelerate, especially for GHG emissions. Some pharma net zero commitments are only nine years away, during which time they have to collect data, engage with suppliers and create roadmaps.’ ‒ HSE and sustainability expert at a leading pharma company.
Water intensity, pharmaceuticals in the environment and API discharges
Industry experts interviewed by LEK Consulting believe that existing regulations do not adequately address these issues and that pharma companies are now expecting suppliers to go beyond regulatory requirements. The increased demand for manufacturing high potency APIs (or HPAPIs), which are often cytotoxic, increases the risk associated with environmental breaches and employee exposure. Adoption of stronger containment systems will be required to address this.
Solid waste management
The increased share of biologics will pose a challenge to managing waste since biologics manufacturing uses more single use elements, such as single use bioreactors, than does the manufacturing of small molecules. This change in product mix can increase solid waste not just in absolute terms, but also when measured per unit of output. Consequently, CMOs/CDMOs will have to take stronger measures to demonstrate progress in solid waste reduction.
Environmental expectations in supplier codes of conduct
To ensure compliance and action, CMOs/CDMOs are implementing supplier assessment systems and sustainable procurement policies, such as a large CDMO’s policy to prioritise low carbon purchases. Supplier codes of conduct require legal compliance at minimum and specify appropriate management and handling systems for waste, wastewater and spills.
Additional clauses in supplier codes of conduct vary but may include expectations to improve resource efficiency and reduce GHG emissions, the latter being particularly important for CMOs/CDMOs looking to reduce their Scope 3 emissions.
How far and fast a CMO/CDMO should progress while setting targets must be decided based on careful discussions with pharma customers, given that environmental performance is not yet the game changer in receiving business. Pharma expectations will depend on the CMO’s/CDMO’s share of manufacturing costs, the CMO’s/CDMO’s performance on key supplier selection criteria relative to competitors and the ease of switching CMOs/CDMOs.
‘We found in our research that there’s clearly a partnership mindset in place as pharmas have a vested interest in maintaining functioning supply chains,’ said Ahnert. ‘And CMOs/CDMOs should leverage the growing number of industry initiatives for supporting them through the transition.’
One example is ENERGISE, an initiative by ten pharmaceutical companies and Schneider Electric to make renewable energy more easily available to their suppliers.5 The initiative will educate pharma suppliers regarding renewable energy contracting and allow them to purchase renewable energy through a collaborative buyers’ cohort. This is expected to lower the barriers to adopting renewable energy, such as negotiating complex contracting processes, and enable long-term power purchase agreements.
From concept to strategy
As pharmas’ scrutiny increases over time, CMOs/CDMOs need to be prepared for changes in expectations and resulting shifts in pharmas’ key supplier selection criteria. Staying ahead of the curve by setting in motion tangible action today can create a competitive advantage in the future.
Developing a roadmap will require careful planning, particularly considering the relative nascency of pharmas’ interest in supply chain sustainability as well as the varying sustainability maturity levels and ambitions among pharma companies. This will involve:
- Assessing external expectations and competitive positioning
- A resilient strategy will incorporate expectations from external stakeholders — pharmas, investors and regulators — and an analysis of the CMO’s/CDMO’s competitive landscape and positioning, in order to inform which actions need to be taken
- Prioritising opportunities for action
- CMOs/CDMOs will then need to evaluate and prioritise opportunities for action carefully and weigh them against other business objectives and the demand for resources. For example, fast-growing CMOs/CDMOs might struggle to set absolute environmental performance targets and may have to define targets relative to output, such as GHG emissions per unit of revenue. The latter will necessitate discussions with pharma customers, which will likely prefer absolute targets in the future and a plan for transitioning to these
- Building the business case and seeking internal alignment
- A business case will be required, demonstrating the expected impact of sustainability action on revenues and costs, as well as required investments, before attaining the internal organisational alignment needed to drive change
‘Sustainability performance is undoubtedly becoming more important in winning business and will become increasingly so as target deadlines get nearer, hence they must be built into a CMOs’/CDMOs’ long-term commercial strategy,’ said Valente. ‘But pharmaceutical companies also need to be mindful of the economic stability and viability of their suppliers because they might find themselves without any manufacturers. There’s a balance on how fast you can push.’
1 Beyond environmental topics, pharma companies are undertaking initiatives to align their policies and processes with ESG (environmental, social and governance) principles. These are not covered in this article but will be topics of subsequent publications.
2 The analysis covered seven CMOs/CDMOs: Samsung Biologics, Boehringer Ingelheim, Lonza, Catalent, Recipharm, Siegfried and Bachem
3 Some organisations also mention incorporating and innovating in green chemistry
4 The SBTi is a partnership between the Carbon Disclosure Project, the U.N. Global Compact, the World Resources Institute and the World Wildlife Fund. It certifies emissions-reductions targets as being ‘science based’ provided they meet the decarbonization levels required to achieve the targets of the Paris Agreement and are aligned with scientific best practices for emissions calculations and reduction. Visit the SBTi website here.
5 The ten companies are AstraZeneca, Biogen, GSK, Johnson & Johnson, MSD, Novartis, Novo Nordisk, Pfizer, Sanofi and Takeda. Read more about the ENERGISE programme at https://perspectives.se.com/blog-stream/energize-program-for-pharma-suppliers.