With the best of intentions, none of the above approaches to sustainable transformation are likely to be successful without seriously considering the intrinsic and extrinsic incentives of managers to bring their teams into alignment with the overall strategic objectives of the organization.
Change management requires buy-in, typically through a combination of good two-way communication to build trust, investment in the resources necessary for the desired change to be successful, and incentives to motivate people within the organization to direct their efforts towards the desired change.
Linking board, executive, and management compensation (and budgets) to sustainability and ESG targets is a highly effective way to ensure alignment with the company’s sustainability goals. This is useful for corporate strategists to remember and factor into their planning: managers are inclined to direct their resources according to the incentivized outcome. This does not necessarily mean that the outcomes will align with the corporate strategy, as the company’s stated objectives may be at odds with how performance is rewarded in practice.
We are already hearing that Life Sciences investors increasingly expect that ESG performance-based remuneration will be linked to topics where Life Sciences have the greatest impact (e.g., social impact related to access to medicine) rather that more general targets (e.g., decarbonization). This empowers Life Sciences companies to be more targeted in their activities and investment towards a net positive impact on society and the environment, using their expertise and resources in places where other sectors have fewer levers to make a difference.
ESG financial instruments are rapidly gaining momentum as companies across various sectors recognize the value of sustainable and responsible practices. In the Life Sciences industry, this trend presents a promising opportunity to access the growing global market for green and social debt. These financial instruments include green bonds and loans, ESG-linked bonds and loans, sustainability bonds, and social bonds, all designed to finance projects with positive environmental and social impacts.
Life Sciences companies that can demonstrate tangible evidence of their ESG activities stand to benefit from lower financing costs. By showcasing commitment to environmental, social, and governance initiatives, companies can attract investors seeking to support sustainable businesses. As a result, they can enjoy significant financial advantages, as studies have shown that companies leading on ESG can achieve up to 2.5 times higher earnings before interest, taxes, depreciation, and amortization (EBIDTA) compared to ESG laggards.37
To capitalize on this growing trend, Life Sciences companies should proactively align their portfolios and research and development (R&D) activities with sustainability objectives. By integrating ESG principles into their strategies, these companies can position themselves to benefit from the capital flowing into sustainable assets. Embracing sustainability and responsible practices not only enhances their reputation and appeal to socially conscious investors but also unlocks potential financial gains and competitive advantages in the market.
However, it’s not only the private sector that has stepped up its game when it comes to allocating capital to innovation and
incentivizing the transition towards increased sustainability. In addition to the green financial instruments offered by banks and other creditors, there is also an increasing number of grants, subsidies and other financial incentives available at municipal, regional, national, and European levels.
Among the current grants and incentives available to the Life Sciences industry to boost sustainability activities, the most significant in Europe include the EU Green Deal Industrial Plan,38 the Horizon EU Innovation Health Initiative,39 and the EU4Health 2024 Work Programme.40
Under the EU Green Deal Industrial Plan in particular, Life Sciences companies can access funding to help scale net-zero
technologies through several multi-billion euro funds and grants. The most substantial of these is the Invest EU fund (totaling EUR 372bn),41 closely followed by the REPowerEU RRF funds (totaling EUR 250bn), as well as the smaller, but still significant, Innovation fund (EUR 40bn).
37 Based on KPMG desk research, drawing on different sources.38 European Commission. (n.d.) The Green Deal Industrial Plan. European Union. Retrieved from: https://commission.europa.eu/strategy-and-policy/priorities-2019-2024/european-green-deal/green-deal-industrial-plan_en39 European Commission. (n.d.). Innovative Health Initiative. European Union. Retrieved from: https://www.ihi.europa.eu/
40 European Commission. (2023). Commission Implementing Decision on the financing of the Programme for the Union’s action in the field of health ('EU4Health Programme’) and the adoption of the work programme for 2024. European Union. Retrieved from: https://hadea.ec. europa.eu/system/files/2023-12/EU4Health%20programme%202024_0.pdf41 InvestEU (n.d.) European Union. Retrieved from: https://investeu.europa.eu/investeu-programme/investeu-fund_en42 European Commission: Directorate General for Research and Innovation. (2022). Innovative Health Initiative. European Union. Retrieved from: https://research-and-innovation.ec.europa.eu/research-area/health/innovative-health-initiative_en
There are also possibilities to participate in funding offered under the Horizon EU Innovative Health Initiative (IHI), a public-private partnership which has a total available funding budget of EUR 2.4bn under the Single Basic Act (SBA) and aims to support the creation of an EU-wide health research and innovation ecosystem for diseases management and healthcare.42
Another example is the EU4Health 2024 Work Programme, which targets COVID-19 and Ukraine-related health issues, alongside the ambition to support mental health, global health, digital health, and cancer screening, while boosting medicine production in Europe. Its total available budget is EUR 752.4m.
These are only a few of the many funding possibilities at EU level of relevance to innovation, research, health, sustainability, and other Life Sciences areas of interest. A more comprehensive overview of currently active EU funding initiatives and platforms can be found on the website: https://eufundingoverview.be
The growing importance of green taxation as a tool to limit the impact of a company’s activities on the environment requires companies to assess the environmental impact of their processes and supply chain. Good management of a group’s environmental footprint assumes a clear understanding of the existing environmental tax contribution of a company, as well as assessing the impact of these changes to the group (e.g., the changes to the EU Energy Taxation Directive, plastics packaging tax, water tax, tax on renewable energy) and tax risk is emerging as a key operational and reputational issue for boardroom agendas.
The impact of these regulations on the Life Sciences sector is wide ranging – from packaging and waste taxation to the impact of the EU Carbon Border Adjustment Mechanism (e.g., on imports of chemicals
such as ammonia). Many companies in the Life Sciences sector are combining their efforts into one broader project – a review of their value chain through a sustainability lens. As Life Sciences organizations get better at mitigating the environmental impact of their activities, this may open the door to some of the advantages offered by governments as incentives for change.
Customers increasingly look to do business with companies that approach tax openly and responsibly. Building that trust starts when companies demonstrate that they are paying the right amount of taxes – when and where they should. Multinational groups with a consolidated turnover of EUR 750 million or more and operating in the EU will soon be faced with a tax transparency requirement through the introduction of the EU Public Country-by-Country Report (“CbCR”) – generally applicable after June 2024.
The Public CbCR will require disclosure of tax relevant information by jurisdiction, such as revenues, amount of taxes accrued and paid, and number of employees. While groups likely already have the required data to populate the EU Public CbCR, the more pressing concern is how such information will be perceived or interpreted by the public. Tax teams will have to work with their Public Relations and Corporate Communications teams to ensure the narrative accompanying this public disclosure is consistent – which business leaders within the group will also need to be informed of and prepared for.
As the legislative landscape continues to evolve, such as with the OECD’s implementation of the global minimum corporate tax rules, it is important for companies to stay abreast of such developments, especially as these may impact local tax incentives and credit
opportunities. While many Life Sciences companies benefit from specific incentive regimes foreseen to attract investments or to support R&D activities, the continued application of these incentives will need to be evaluated against the ongoing implementation of the global minimum tax rules.
In the EU, there is an ongoing trend towards the legal enforcement of human rights due diligence. The EU Taxonomy Regulation requires that companies in scope fulfil minimum safeguards for human rights, requiring targeted due diligence, and according to the Corporate Sustainability Reporting Directive (CSRD), human rights due diligence should feed into double materiality assessments.
European Sustainability Reporting Standards (ESRS) also require reporting companies to disclose information on their human rights due diligence and additional rules on how companies must conduct human rights and environmental due diligence will be further enforced through the forthcoming EU Corporate Sustainability Due Diligence Directive (CSDDD), which is projected to be ratified in 2024. The scope of the Directive extends to both large EU and Non-EU companies, although smaller entities might also experience indirect ramifications.
“At Fresenius, our comprehensive human rights due diligence program closely connects with our core responsibilities as a healthcare company: Respecting human rights in all our activities. Building on the UN Guiding Principles on Business and Human Rights (UNGP), our program extends group-wide to prevent, end, or minimize adverse impacts on human rights and the environment in our own operations and supply chains.
The support of our Management Board is crucial for implementing human rights due diligence on a global scale. Overseeing the program, the Management Board has also anchored this commitment in a human rights statement applying across all operations and to our suppliers. As part of the five pillars of our program, our risk assessments evaluate human rights impacts, define and implement risk-minimization measures, and facilitate internal and external reporting on our progress. A dedicated grievance system also enables employees and all external stakeholders to anonymously report possible human rights or other compliance violations. Collaborating and promoting information exchange across our companies is a fundamental aspect of our human rights program, so we’ve established an interdisciplinary Human Rights Council consisting of representatives of various departments.
While we’ve made good progress, upholding human rights and environmental compliance across multinational operations and supply chains requires constant development and improvement. We use platforms and automated processes to improve supply chain transparency. This is a challenging task, working with thousands of Tier-1 suppliers in complex supply chains and depending on more than 190,000 colleagues in production sites, clinics, and offices around the globe.
We care deeply about upholding our human rights commitment because we see it as our responsibility to not only comply with regulations and societal expectations, but to extend this commitment to our partners. We plan to expand exchange with stakeholders based on risk analysis results, as accelerating progress with our human rights program depends on collaboration and continuous improvement.”
Lasse Kowalewski Head of Group Human Rights Office Fresenius
In addition to the EU legislation, several countries (e.g., France, Norway, Germany) have adopted legislation requiring human rights due diligence to at least some level. For example, the German Supply Chain Act already imposes penalties of up to 2% of global revenues for infractions. CSDDD is envisaged to be enforced through administrative supervision and civil liability. Member States will designate an authority to supervise and impose effective, proportionate and dissuasive sanctions, including fines and compliance orders. Additionally, Member States will ensure that victims receive compensation for damages resulting from the failure to comply with the obligations of the new proposals.
Especially given the critical role of human rights in clinical and product trials in the Life Sciences industry, we recommend that large Life Science companies incorporate and ensure adequate CSDDD compliance in their core business strategy, including dedicated oversight by directors at the management and board levels.
New ESG regulations are introducing additional obligations for supervisory and management bodies. What’s more, ESG governance is increasingly operating in an environment of pressure from social activism and climate litigation.
For example, company directors face direct liability with respect to Articles 25 and 26 of the proposed Corporate Sustainability Due Diligence Directive (CSDDD), which outline the requirements that company directors must fulfil regarding duty of care and the duty to set up and oversee due diligence. More specifically, Article 25 stipulates that directors are expected to ‘take into account the consequences of their decisions for sustainability matters, including, where applicable, human rights, climate change and environmental consequences, including in the short, medium and long term.’43 Directors also face indirect liability under Article 22 of the CSDDD, which outlines rules on civil liability for companies, as well as potential interaction with corporate legislation at national level.
As a general standard, companies need to make sure that they put the right governance bodies in place to manage and steer/oversee ESG and equip those bodies with the skills and resources to do the job correctly. It can also be valuable to add an 'outside-in’ dimension to the governance structure, by appointing an external ESG advisory board that acts as a sounding board and has an accountability role in ensuring that the supervisory board and management are kept updated as to what's expected of them.
43 European Commission. (2022). Proposal for a DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on Corporate Sustainability Due Diligence and amending Directive (EU) 2019/1937. COM/2022/71 final. European Union. Retrieved from: https://eur-lex. europa.eu/legal-content/EN/TXT/?uri=CELEX%3A52022PC0071
