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Accelerating the transition to net zero in life sciences

August 19, 2023

The majority of the industry’s emissions are Scope 3. By working with suppliers, companies can achieve net zero with 60 to 70 percent abatement at cumulatively zero cost.

The life sciences industry, which includes pharmaceutical and medtech companies, contract manufacturers, healthcare distributors, and others, has an innate purpose in society, providing life-saving therapies, medicines, diagnostics, and devices. And while safety and quality are critical priorities, an ever-increasing number of companies aim to deliver treatments in a manner that also considers the sector’s broader social and environmental impact.

Environmental effects, in particular, have a significant impact on health outcomes, which decarbonization can help mitigate. Today, leading life sciences companies are looking at sustainability not only as a compliance requirement but also as a source of value to their patients, their organizations, and the planet. This value could differentiate their businesses by enabling additional volume gains, driving more efficient operations, and securing costs of materials with a supply–demand mismatch before green premiums increase.

Within sustainability, net zero has gained significant traction, aiming to strike a balance between the amount of greenhouse-gas (GHG) emissions generated and the amount eliminated from the atmosphere. In fact, McKinsey research found that, from 2019 to 2022, the number of life sciences companies that have committed to or set Science Based Targets initiative (SBTi)1 emission-reduction targets increased from seven to 104. Life sciences companies typically focus on three areas on their decarbonization journey:

  • Ambition and investments. This involves defining the ambition level and considering risks, benefits, and costs in line with SBTi requirements.
  • Road map and launch of execution. This includes initiating planning on lower-carbon sourcing, green operations, circular business models, and sustainable product design, as well as engaging or partnering with key stakeholders across the value chain.
  • Operationalization and sustaining change. This entails defining the right governance, building capabilities and processes, and supporting delivery.

McKinsey analysis has found that the majority of emissions in the life sciences industry fall under Scope 3, which means they occur outside the direct control of organizations. Thus, the challenge moving forward will be crafting a successful Scope 3 emission-reduction approach to achieve these targets, which requires operational and technological improvements as well as buy-in from suppliers, distributors, healthcare providers, and other stakeholders in lowering life cycle emissions.

This article shows how life sciences companies can make both defensive and offensive plays to address carbon emissions3: playing defense by meeting regulatory requirements that extend the license to operate and playing offense by bringing lower-carbon products to market faster and securing the supply of green materials before green premiums spike. Doing so entails focusing on supplier selection, operating model and capabilities, product specification, partnerships and collaboration, and end-of-life solutions.

Carbon emissions in life sciences: An overview
For most industrialized nations, healthcare systems account for nearly 10 percent of national GHG emissions, a higher proportion than either the aviation or shipping industries.4 If the global healthcare sector were a country, it would be the fifth largest GHG emitter on the planet, annually producing two gigatons of CO2 equivalent.5 And, according to McKinsey analysis, within the healthcare sector, the emissions intensity (in terms of tons of CO2 per million dollars of revenue) for life sciences companies can be two to three times higher than that of healthcare delivery organizations.

To better understand the cost implications of decarbonization, we provide deep dives on two industry subsectors, pharmaceuticals and medtech, to show what successful operationalization and execution looks like. The hope is that by focusing on the emissions baseline, decarbonization viability and cost, and major decarbonization levers, companies in these spaces can better understand how to set and achieve their ambitions in the years to come.

Case study one: Pharmaceutical companies
McKinsey analysis of approximately 40 pharmaceutical companies shows that about 75 percent of emissions across the value chain are Scope 3, with 50 percent of the total emissions coming from upstream, specifically the purchased goods and services category.

Decarbonization viability and cost

Using existing and emerging levers, a typical pharmaceutical company can abate approximately 90 percent of its total emissions at the cost of around $100 per metric ton of CO2 by 2040,6 which is within the range of projected carbon prices included in the EU Emissions Trading System (EU ETS).7 Meanwhile, the remaining 10 percent will likely be difficult to abate with common levers and can therefore be addressed with short-term strategies, such as carbon offsets from the carbon market (see sidebar, “What are carbon offsets?”).

One of the major concerns when setting ambitious decarbonization targets is cost. However, McKinsey analysis of the emissions profile of a representative pharmaceutical company shows that about 30 percent of emissions can be abated by levers with positive net present values (NPVs), meaning they lead to cost savings, and approximately 15 percent of emissions can be addressed by NPV-neutral levers. Cumulatively, around 60 percent of total emissions can be abated at net-zero cost (Exhibit 1).

Major decarbonization levers and impact
In the category of purchased goods and services (which accounts for 50 percent of total emissions), raw materials—including active pharmaceutical ingredients (APIs), excipients, and process chemicals—make up approximately 70 percent of emissions (and around 35 percent of total emissions), with the remaining 30 percent largely coming from packaging (Exhibit 2). For raw materials, switching to alternative fuel, alternative energy,8 and carbon capture and storage (CCS)9 are the major drivers to decarbonize the chemical production process for upstream suppliers. READ MORE

By Maria Fernandez and Lucy Pérez


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