Scope for action: How the life sciences industry can make progress towards net zero
With the next global climate conference, COP28 in Dubai, having begun on 30th November, many businesses have been taking stock of their own record. Life sciences has a role to play. Combined with healthcare, the sector accounts for more than 4% of global greenhouse gas (GHG) emissions.
For life sciences, though, there is a particular challenge: more than 75% of its emissions are “Scope 3”, meaning derived from the value chain, not its own operations. Examples include emissions from active pharmaceutical ingredients (API) manufacturers for a pharmaceutical company or a parts supplier for a medical technology company. By definition, these are outside the life science companies’ direct control - but that does not mean outside their responsibility.
We believe that, individually and collectively, the sector can do more - and that those that do could find long-term competitive advantage, as has happened in other industries. For example, McKinsey research has found that green leaders in EU chemicals companies have seen their enterprise multiples rise two to five times; those for the lowest have stagnated.
A McKinsey analysis of 40 pharma companies found that 57% of total emissions could be abated at with cumulative near-zero cost by 2040, with about 33% actually saving money. For the 75 medtech companies analysed, 70% of total emissions could be abated with cumulative net zero cost, and 11% saving money. All told, reaching net zero would cost about $65 to $100 per ton of GHG abated; that is in line with carbon price forecasts of the EU Emission Trading Scheme.
Well-established practices such as recycling and energy efficiency can go a long way. But deep decarbonisation will mean going further. In addition to engaging Tier-1 suppliers - those with whom companies have direct contact - they will also need to work with lower-tier suppliers, who can make up two-thirds of emissions in some cases.
It’s time for life sciences to consider moving from a defensive approach of meeting rules and regulations, and towards one of playing offense, which can transform business models and create real business value. To do so, they need to act systematically, and throughout the value chain.
Taking action in five areas can accelerate the journey.
Supplier selection. 90% of life sciences companies surveyed indicated that emissions are an important factor in supplier selection. The challenge here is going beyond Tier 1 suppliers, into areas where risk exposure is unknown. In the API supply chain, that can mean engaging oil, gas, and chemical producers, where there is a wide variety of sustainability practices.
Internal operations. Decarbonisation will require collaboration across many functions, ranging from R&D to procurement to manufacturing. One promising approach is to use digital solutions, such as value-chain twins. These can virtually replicate supply chains in minute detail and identify ways to reduce emissions.
Product specifications. Evidence from other industries has proved that applying sustainable-by-design principles to products and packaging can cut emissions and costs simultaneously. Examples include using a higher percentage of recycled content, cutting materials use and weight, and improving disassembly and sorting, in line with regulatory requirements.
Partnerships and collaborations. Reducing emissions is a team sport. Demand for low-carbon materials is likely to grow, straining supply. To encourage investment in this space, companies can establish purchase agreements, or finance innovation and production-capacity increases with suppliers.
End-of-life solutions. This refers to how sold products are treated and disposed of and is particularly important to medtech companies. One area of great potential is materials recycling, which McKinsey estimates can abate roughly 10% of sector emissions at low or no cost. This figure could rise as advanced-recycling capabilities become more widely available. Other approaches, such as managing hospital waste, may require a high degree of collaboration. Developing effective end-of-life solutions can also mean experimenting with new business models, such as buy-back programmes. Within operations, companies can develop second-life capabilities and zero-landfill or zero-incineration solutions.
Many life sciences companies have embarked on this journey; they are making significant investments and embedding decarbonisation in decision-making all along the value chain. From 2019-2022, the number who committed to or set science-based targets rose from seven to 104.
There is a strong business case to being an early sustainability mover, such as accessing lower-carbon inputs (before green premiums increase significantly), finding new growth opportunities, building a stronger value proposition to attract talent, and enhancing innovation capabilities. That said, we do not underestimate the challenge. Not only will deep decarbonisation require the support of suppliers, distributors, and healthcare providers, but not all reductions will come cheap. Higher energy costs and an uncertain economic environment don’t help.
Given the impact climate change also has on health, however, there is every reason for the life sciences industry, which is dedicated to improving human life, to encompass addressing climate change in its mission, too.
About the authors
Maria Fernandez is a partner with McKinsey and leader in the sustainability in life sciences service line, with a deep focus on decarbonisation enabled by procurement and technology. Having served the life sciences value chain from CDMOs and generics in India to innovators, PBMs, and hospitals in the US, she is passionate about helping the life sciences industry to not just save lives, but also the planet.
Claudia von Hammerstein is a partner at McKinsey, where she co-leads the sustainability in life sciences service line and represents the McKinsey Health Institute on sustainability and health. She works with for-profit, not-for-profit, and non-profit entities across the value chain globally to advance global health.
Robin Nuttall is an expert partner in the firm’s London office. He is a leader in McKinsey’s environmental, social, and governance (ESG) and regulatory work, and serves clients on these topics across a range of sectors.
