Andrea Sternisko Head of ESG Life Sciences & Chemicals / Partner of the ESG Service Group KPMG in Germany
44 European Commission. (2021). The European Green Deal. European Union. Retrieved from: https://commission.europa.eu/strategy-and-policy/priorities-2019-2024/european-greendeal_en#:~:text=The%20European%20Green%20Deal%20%E2%80%93%20A%20commitment%20to%20future%20generations&text=To%20overcome%20these%20challenges%2C%20the,growth%20decoupled%20 from%20resource%20use
The international policy and regulatory landscape is pushing the Life Sciences sector to increase investment and action on ESG. In Europe, the main regulatory frameworks that Life Sciences companies need to align with are the Corporate Sustainability Reporting Directive (CSRD) and the EU Taxonomy (EUT). These frameworks stem from the EU’s flagship climate project, the European Green Deal, which contains a comprehensive range of policy and sustainable financing initiatives designed to ensure that the EU will become the first climate-neutral bloc by 2050.44
It’s also important to note that the EU’s ESG regulation is not limited to reporting requirements. There are many other standards and criteria that are relevant – or may become relevant – to Life Sciences companies, such as eco-design or extended producer responsibility, which impact product development, supply chains, and product life cycle planning.
“As a leading MedTech company, Olympus is committed to sustainability as we understand the impact of our business activities on the environment and society, but also the opportunities of a sustainable business model and transparent communication with our stakeholders. Therefore, we consider the implementation of the CSRD not only as a challenge but also as a driver for transformation.
Collecting necessary data from operations and our supply chain requires clear processes for data collection, ensuring data accuracy, reliability, and consistency, and meeting the requirements of the CSRD. Establishing appropriate internal controls requires clear processes for data validation and verification, identifying and addressing potential errors or inaccuracies in ESG reporting. Aligning ESG reporting processes with overall business strategy and objectives requires clear goals and targets for ESG performance, integrating ESG reporting into decision-making processes, and meeting the reporting deadlines and requirements set out in the regulation.
On the Olympus sub-holding level, based in Europe with headquarters based in Japan, we face additional challenges in aligning the European regulatory requirements with reporting requirements for the whole Olympus Group, ensuring ESG data points and reporting processes are consistent with the requirements of the relevant jurisdictions.
To meet these needs, we defined an effective ESG Target Operating Model and an appropriate ESG Governance structure, incorporating ESG factors into our overall business strategy and objectives, with clear goals and targets for ESG performance, integrating ESG reporting into decision-making processes, and defining reporting processes and responsibilities.
As a MedTech company, we are committed to upholding the highest standards of sustainability and ethical business practices, and we will continue to invest in our ESG-Governance structure and ESG Target Operating Model to ensure that we are meeting the evolving needs of our stakeholders.”
Cornelia PeškoEnvironment & Safety Manager Corporate Quality Management OLYMPUS EUROPA SE & CO. KG
The EU Taxonomy Regulation45 underpins sustainability frameworks on financial and non-financial reporting by providing an EU-wide classification system for sustainable economic activities. It provides standardized definitions of what is and isn’t considered sustainable from a European regulatory perspective and is mandatory for all companies in scope of the CSRD.
When the CSRD comes into effect, the EUT reporting scope will widen to include European entities that fulfil two of the following three criteria: i) 250+ employees; ii) exceeding EUR 25 million net turnover; iii) exceeding EUR 50 million balance sheet total, as well as listed small and medium-sized entities.46 For companies headquartered in third countries with subsidiary operations in the EU, the threshold for inclusion under the EUT reporting scope is a net turnover of EUR 150 million generated in the EU.
In April 2023, the European Commission published the EUT Technical Screening Criteria for the environmental objectives focused on water and marine resources; circular economy; pollution prevention and control; and biodiversity and ecosystems – all of which are relevant for Life Sciences companies as outlined in previous chapters - and for the first time included two specific economic activities for pharmaceutical companies under the pollution prevention and control environmental objectives: 1.1 “Manufacture of active pharmaceutical ingredients (API) or drug substances” and 1.2 “Manufacture of pharmaceutical products.”
This widens the activities that are now considered material for Life Science companies to disclosure in their annual sustainability statement.
45 Regulation (EU) 2020/852 of the European Parliament and of the Council of 18 June 2020 on the establishment of a framework to facilitate sustainable investment, and amending Regulation (EU) 2019/2088 (Text with EEA relevance). (2020). Official Journal of the European Union, L 198, p 13–43. ELI: http://data.europa.eu/eli/reg/2020/852/oj46 KPMG. (2023). De-tangling the EU Taxonomy. Retrieved from: https://kpmg.com/be/en/home/insights/2023/06/sus-de-tangling-the-eu-taxonomy.html
1.1 “Manufacture of active pharmaceutical ingredients (API)" or drug substances is described as the manufacture of any substance or mixture of substances intended to be used in the manufacture of a pharmaceutical product including receipt of materials, processing or packaging of the API and related controls. The economic activities in this category could be associated with NACE code C21.1 in accordance with the statistical classification of economic activities established by Regulation (EC) No 1893/2006.
1.2 “Manufacture of pharmaceutical products” (or drug products) includes operations of receipt of materials, production, packaging, repackaging, labelling, re-labelling, quality control, release, storage, and distribution of APIs and related controls. The economic activities in this category could be associated with NACE code C21.2 in accordance with the statistical classification of economic activities established by Regulation (EC) No 1893/2006.
As companies shift from the Non-Financial Reporting Directive (NFRD) to CSRD, a new auditing requirement emerges. Under the CSRD, companies are now mandated to obtain limited assurance for their non-financial information. This process necessitates auditors to provide a conclusion that, based on their procedures, they are not aware of any material misstatements in the reported data. However, unlike typical limited assurance, this initial phase under the CSRD will involve a more comprehensive audit process due to the newness of the requirement and the associated risks, particularly in the first year of its application.
After three years, it is anticipated - though not yet confirmed - that the European Commission may advance the requirement to reasonable assurance, further aligning it with the standards applied to financial reporting. This transition is integral to enhancing the connection between financial and non-financial information, necessitating more rigorous data collection and reporting processes.
In addition to the European Green Deal frameworks that impact all companies operating in Europe, there are five key regulatory changes that Life Sciences companies need to keep up with:
At every level, there are significant regulatory changes underway that require Life Science companies to invest in their data architecture to be fully compliant with mandatory disclosure requirements. By preparing today, companies can avoid costly penalties later on.
Fully prepared and already implementing
Somewhat prepared and developing processes
Not yet prepared but planning to address it
Not prepared and no plans to address it
Unsure or looking for guidance
