Accelerating the transition to net zero procurement for life sciences

Our practice is dedicated to guiding our clients in navigating an ever changing business and regulatory world. In this article, as life sciences businesses transition to net zero, we'll focus on addressing Scope 3 emissions, which are particularly significant in this sector, and ensuring management and compliance through your selection of, interactions with and contracts with commercial partners. 

Scope 3 emissions are those emissions not produced by an organisation itself, and not the result of activities from assets controlled by them, but by those that it is indirectly responsible for up and down the value chain.

Context and perspective

We see a growing emphasis on addressing Scope 3 emissions in supply chain contracting within the sector, across the development, manufacturing and supply of medicines, medical devices and other related products. This shift is driven in part by the need for business to meet stringent sustainability targets, as required by the sector, and developing regulatory requirements.

From the perspective of a manufacturer or supplier, the push towards reducing Scope 3 emissions is becoming increasingly evident. Large pharma companies are themselves, and through consortia, setting ambitious targets for their entire value chain, impacting their direct and indirect suppliers. Payers (such as the NHS in the UK) are also requiring suppliers to demonstrate their net zero credentials as a condition of supply.

Scope 3 emissions account for up to 90% of all emissions in life sciences businesses. While the direct benefits of reducing emissions are clear for society, businesses can also realise significant indirect benefits from their approach to tackling climate change, such as through:

• Competitive edge: early movers in the space can resonate with environmentally conscious stakeholders
• Enhanced innovation and efficiency: effective approaches to achieve Scope 3 emission reductions can drive innovation and broader efficiencies across the supply chain and internal operations, such as through the adoption of technologies including AI-based and digital solutions. New technologies like those in the quantum space may also have a significant impact as they will allow parties to optimise their processes.

Key issues and themes

The primary considerations to address in this context are:

• Stringent reporting regimes: legislation in the EU (CSRD), the US (SEC) and other jurisdictions is becoming more stringent, and the regulatory frameworks will continue to evolve
• Product regulation: new EU pharmaceuticals regulation will give regulatory authorities the right to refuse or withdraw marketing authorisations (MAs) where environmental risks are not sufficiently addressed
• Industry initiatives: large pharma companies, CROs and trade bodies like EFPIA are promoting good practice, through initiatives like the adoption of circular economies, purchasing schemes and reduction of packaging and materials waste.

Scoping contracting and procurement approach

We recommend taking a holistic and cross-functional approach to supply chain contracting. This will involve looking at both upstream and downstream aspects, considering the whole journey from product design, development, sourcing and manufacturing through to supply and distribution. Supply chain risk modelling, using tools like value-chain twins and AI, eg, in relation to clinical trials, can help to identify and refine priorities.

Reducing emissions is a team effort. You'll need to collaborate effectively with your supply chain partners on the measurement and management of emissions and embed key principles for working together in contracts.

Contracting specifics

We recommend adopting a principles-based approach to contracting, focusing on the following areas:

• Supplier selection and diligence: when choosing your commercial partners, do detailed diligence on their credentials, specify mandatory carbon reporting and reduction requirements in tender proposals, all backed by broad-ranging audit provisions within the contract
• KPIs: the contract will require compliance with law and industry standards but consider also including specific performance indicators, such as carbon reduction measures in contracts, with penalties for non-compliance. You could also consider rewarding progress, through preferential pricing or payment terms for meeting agreed measures.
• Information provisions: ensure contracts include appropriate reporting obligations. These might be specific obligations around providing information and backup data to support your own claims and reporting.
• Rights and remedies: include an obligation to produce and action improvement plans if measures are not met and termination rights if issues persist
• Build in flexibility in contracting to address changing requirements and to build resilience
• Establish supplier forums for sharing best practice and provide training to suppliers on decarbonisation approaches

Meeting regulatory and industry challenges around net zero and the management of Scope 3 emissions can be daunting. By taking a structured, proactive approach, life sciences companies can accelerate their transition to net zero, reducing emissions and ensuring compliance, managing reputation and driving innovation across the supply chain, all at the same time.