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.2 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.
Redesigning packaging or products can also help reduce the volume of materials required. Coupled with an effort to source lower-carbon packaging materials, such as recycled or bio-based plastics, this approach could help abate up to 90 percent of total packaging emissions by 2040.
Case study two: Medtech companies
Based on McKinsey analysis of the emissions profiles of about 75 medtech companies, more than 90 percent of a typical player’s carbon emissions fall under Scope 3. Of the major Scope 3 contributors to medtech’s carbon emissions, purchased goods and services account for approximately 45 percent of the total, while the use of sold products downstream accounts for about 28 percent.
Decarbonization viability and cost
Approximately 90 percent of total emissions across the value chain can be abated with available or emerging decarbonization levers, at a cost of about $70 per ton of CO2 by 2040 (which is within the range of global projected carbon tax10). The remaining hard-to-abate emissions can be addressed by carbon offsets.
Approximately 11 percent of a typical medtech company’s emissions can be addressed by NPV-positive decarbonization levers, and 30 percent can be addressed by NPV-neutral levers. Cumulatively, about 70 percent of the medtech industry’s total emissions can be abated at net-zero cost (Exhibit 3).
Major decarbonization levers and impact
For purchased goods and services, raw materials such as metals and plastics usually account for 70 percent of emissions, with the remaining emissions coming from packaging (Exhibit 4).
- For raw materials, key drivers to decarbonizing emissions include CCS in raw-materials manufacturing and the use of high-quality recycled raw materials (such as high-density polyethylene and stainless steel).
- Package or product redesign and the use of low-carbon packaging materials can help reduce up to 90 percent of total packaging emissions by 2040.
Sustainably addressing carbon emissions in life sciences
Several life sciences companies are already reporting on their progress to address Scopes 1 and 2 emissions,11 and they are implementing green initiatives to reduce the emissions from their own operations. However, the challenge in the years to come will be tackling Scope 3.
Five bold actions can support life sciences companies in this journey (Exhibit 5). These actions work together to bring operational and technological improvements, and they require buy-in from suppliers, distributors, healthcare providers, and other stakeholders in lowering life cycle emissions.12
The emission footprint of suppliers is considered a selection criterion for more than 90 percent of the leading life sciences companies, especially when quality, cost, and availability are comparable.13 For example, as part of the Health Systems Task Force, several global life sciences companies have required their suppliers to set science-based targets for decarbonization by 2025.14 The challenge, however, is ensuring that the commitment on decarbonization extends beyond tier-one suppliers (those in direct contact with companies) to tier n (those in the lower levels of the supply chain, which typically have unknown risk exposures). For example, in the API value chain, upstream suppliers such as oil and gas and basic-chemical producers have largely committed to decarbonization, while the suppliers between them and the life sciences companies (which contribute 50 percent of emissions) have not all committed to decarbonization.
Internal operating model and capabilities
McKinsey’s recent sustainability benchmark survey shows that the areas with the most potential for improvement in life sciences are innovation (through R&D) and the supply chain (through procurement).15
Organizations can also invest in capability building so employees understand how their choices affect others beyond their own functions—for instance, how supplier choice could affect product innovation and overall carbon emissions. This can be done through workshops, digital classes, and training sessions, as well as by building internal carbon measuring, tracking, and reporting solutions to create transparency.
In addition, digital solutions, such as value chain twins, can help map where carbon emissions occur across multiple products and can also be traced back to source materials, effectively allowing life sciences companies to build a view of their tier-n value chain. In fact, by focusing on only three suppliers in the tier-n value chain, a company with five million metric tons of emissions and 2,000 suppliers could abate 35 percent of its emissions.
Product and packaging redesign has the potential to achieve the dual mission of reducing carbon emissions and lowering cost. In fact, McKinsey analysis of select products shows that carbon emissions can be reduced by 30 percent, with cost savings of 10 percent.
On this point, life sciences companies can adopt sustainable-by-design principles, including designing for higher recycled content and component-to-component recycling, decreasing material content in end products, developing better disassembly, and improving sorting approaches and technologies. For example, one company evaluated design levers through product analysis, identified initiatives to reduce its carbon footprint and costs at the same time, and validated the initiatives with R&D, procurement, and customer feedback. Based on the results, the company was able to reduce carbon emissions by approximately 40 percent and costs by 24 percent.16
Partnerships and collaborations
With more companies ramping up their net-zero commitments, the demand for low-carbon feedstock will outpace supply and result in a significant supply–demand mismatch as early as 2030.17 On this point, McKinsey research has found that in 2035, the demand for sustainable methanol, a process chemical for many APIs, could be two to three times higher than the available supply.
To encourage investment in R&D or production capacity for lower-carbon materials, life sciences companies can work with their suppliers to establish purchase agreements for large quantities of materials or even directly finance innovation and production-capacity increases for the low-emission materials they require.
End-of-life solutions typically center on collaborations with healthcare delivery organizations, given the amount of waste generated in hospitals, and for this reason primarily apply to medtech companies. Here, materials recycling can abate approximately 10 percent of total emissions at relatively low cost or even with potential savings. On this point, some life sciences players are developing advanced-recycling capabilities.18
End-of-life solutions involve both new business models and circular modes of operation. On the business model end, life sciences companies can create value through buyback programs, for example. And on the operations side, they can enhance circularity by developing refurbishments for second-life capabilities and zero-landfill or -incineration solutions. For example, an American multinational medtech company provides reprocessing and remanufacturing services for single-use medical devices that optimize financial and environmental sustainability.
Although life sciences companies have to deal with near-term profit-and-loss pressures, they still need to accelerate their decarbonization efforts, given the long time to develop lower-carbon products, the limited ability to change product footprints, and the need to build up lower-carbon sourcing capabilities. In addressing sustainability in life sciences, there is potential to limit the negative impact of climate change and to ensure the continuity of supply. Based on the track records of other industries, the strategic benefits of being a first mover far outweigh the temporary cost of capital investment—in regard not only to social, patient, or environmental benefits but also to revenue (potentially by locking in additional volume) and managing cost (by securing contracts before green premiums significantly increase). Considering all these points, it is critical that life sciences companies take action today to accelerate the transition to net zero.