While regulators are currently allowing some flexibility to give companies the opportunity to transform their business models, we expect oversight to become stricter in the coming years as we approach the end of the
phase-in periods for frameworks such as the EU Taxonomy and CSRD, with significant penalties for non-compliance.
Meanwhile, Life Sciences companies may also discover that companies that are sustainability leaders will have the widest choice of financial instruments to access to increase their profitability (EBITDA) and the competition for these instruments is still low, which increases strategic opportunities.
However, we do not expect that this will continue indefinitely. While early-moving companies and consumers have received significant subsidies and tax advantages for switching to more sustainable technologies, as these markets mature and become more independently sustainable, the levels of subsidies are gradually decreasing, so latecomers to the market have significantly fewer options to avail of incentives to ease their investment.
We expect to see a similar pattern when it comes to ESG subsidies and incentives – early companies and leaders will have many more opportunities to increase their upside from their investments, whereas laggards who invest only to the level of minimum compliance will see much lower returns and fewer opportunities.
However, Life Sciences companies’ investment in ESG and sustainability is not just driven by the sticks and carrots of regulatory considerations and extrinsic financial incentives. There is real recognition in the sector that investing in sustainability and ESG is part of an overall business opportunity to gain competitive advantage, as customer and partner behavior shifts to prioritize more responsible suppliers who can demonstrate that their sustainability and ESG values run deep and are widespread throughout their organizations.
This is supported by 2023 research by Source, which revealed that 79% of companies surveyed in the EMEIA Life Sciences sector expect their investment in sustainability and ESG to increase in the next three years.47
There are many reasons to be motivated and optimistic about the Life Sciences sector’s evolution into a leading force for good when it comes to sustainability and ESG. We are no longer in a market populated solely by tentative sustainability pioneers. Enhanced by a rapidly expanding range of technological advances, the ESG realm is now settling into a phase of greater cohesion and maturity, in which those purpose-driven Life Sciences companies that have their sustainability, ESG, and digital infrastructure in place will reap the greatest benefits and cement their position as market leaders for the coming years.
47 Price, B. (2023). Life Sciences: KPMG EMEIA Sector Growth Opportunities. Source. [Presentation]
Coordinating change management
Developing social impact partnerships
Improving environmental performance
Improving sustainability governance
Preparing for ESG reporting and assurance (e.g. CSRD)
Internal and external stakeholder communication
Invest in coordinated change management throughout the entire organization and value chain. As tempting as it may be to make small tweaks here and there, what we’ve seen time and again is that a hesitant approach leads to hesitant results. We encourage business leaders to be bold, leverage systems-thinking and take a coordinated approach to change management that successfully transforms their businesses. Strategic communication to ensure buy-in across all levels of the organization and value chain is critical here as well.
Develop affordable therapies and products. Life Sciences companies are in the unique position of being able to have a positive social impact at every stage of the patient's journey: from prevention, to treatment, to management and/or cure. As a critical sector, the products and services developed by Life Science companies are needed in every country and community. This places Life Sciences companies in an influential position in healthcare ecosystems that they can leverage for social good to ensure fair, equitable, and affordable access to their products and therapies, and is a key pillar upon which the reputation of Life Sciences companies is upheld or weakened.
Improve ecology and environmental performance. Given the close relationship between Life Sciences companies and the environment,
this is a no-brainer. It’s in the existential interest of Life Sciences companies to invest in and support initiatives that reduce environmental harm, regenerate biodiversity, and increase circularity of products and materials.
Implement better governance. Increased regulation brings increased scrutiny by stakeholders and risk of liability for directors. Life Sciences companies should reduce risks by investing in the appropriate technology for data collection and ensure that due diligence and monitoring activities are taken seriously – especially in areas of the value chain where there is higher third-party risk.
Prepare for ESG reporting and assurance. Love it or hate it, ESG is here to stay for the foreseeable future. While regulators are currently allowing some flexibility to give companies to adapt to the new requirements, investing in improving your company’s ESG performance now can reduce your exposure to regulatory risk and help you avoid costly surprises in the future.
Prioritize responsible and transparent stakeholder communication. This is critical to build and maintain trust in the intentions and activities of Life Sciences companies. Being proactive in communicating and collaborating with regulators, partners, investors, communities, customers, and others in the value chain is essential to demonstrate leadership and deliver on sustainability and ESG objectives.
