Sustainability - trends and developments life sciences companies should be aware of

No longer peripheral to how businesses operate, sustainability has cemented itself as a cornerstone of corporate risk management and the ever-expanding range of environmental, social and governance (ESG) related considerations continue to shape strategies and drive business transformation. 

In this article, we explore some of the key trends and sustainability-related developments that life sciences companies should be aware of. This includes the rise of mandatory reporting and disclosure requirements, the expanding sustainability risk landscape, the increasing focus on social factors, and how sustainability is being embedded into strategy and business operations.  

Obligatory sustainability reporting comes into force

Historically, sustainability reporting by corporations has been voluntary, with some companies choosing to align with international reporting frameworks such as the Task Force on Climate-related Financial Disclosures. However, this is beginning to change as governments across the world are incorporating obligatory sustainability reporting into national law. As a result, businesses are facing the challenge of not only reorganising their internal processes to stay up to speed with new regimes but must also ensure that they have in place sufficient data gathering and reporting procedures to meet the new requirements.

The EU Corporate Sustainability Reporting Directive (CSRD) – which came into effect in January 2023 and has a first implementation phase for financial years starting on or after 1 January 2024 – is an important development in this area. CSRD was developed with the aim of providing access to higher quality sustainability data at the same standard of disclosure as financial reporting.  CRSD requires in-scope companies to report on a range of sustainability matters that are material to their business and operations. It not only impacts in-scope EU companies but also non-EU companies that have substantial operations within the EU. CSRD is novel as it requires companies to consider both how sustainability matters will impact the company financially and the impacts that a company has on sustainability matters – the so-called "double materiality" concept. For further details, see our CRSD briefing.

Another important global sustainability standard is the IFRS Sustainability Disclosure Standards, which have been developed by the International Sustainability Standard Board. This standard, known as ISSB, sets a global baseline for the quality of sustainability disclosure in line with accounting principles. Unlike CSRD, ISSB focuses only on how sustainability matters impact the company financially. The UK and Australia have based their national corporate sustainability disclosure laws on these standards and the new UK Sustainability Reporting Standards are expected to be endorsed by the UK Government in Q1 2025, to come into effect in 2026.  

Sustainability due diligence becomes mandatory

In addition to reporting requirements, ESG-related due diligence regulations are expanding, with companies facing more onerous obligations not just to report on the impact of their operations but to also take proactive steps to address their identified impacts.  

A significant recent development in this area is the EU's Corporate Sustainability Due Diligence Directive (CS3D), which entered into force on 25 July 2024. CS3D represents a pivotal shift in sustainability regulation, introducing obligations on in-scope companies to identify and address actual or potential adverse human rights and environmental impacts arising from their own operations, their subsidiaries and their business partners. It not only applies to large EU companies but also to non-EU companies with significant operations within the EU. 

Companies falling within the scope of the CS3D will need to conduct risk-based due diligence processes to ensure they:

• integrate due diligence into their policies and risk-management systems;
• identify, assess and (where necessary) prioritise potential and actual adverse impacts;
• prevent and mitigate potential adverse impacts; and
• bring actual adverse impacts to an end.

Companies subject to these obligations will have to conduct supply chain diligence to ensure they have sufficient policies, processes, and procedures in place to ensure compliance and assess – and possibly even re-negotiate – commercial contracts in light of new and anticipated requirements. For those in-scope companies in the life sciences sector with large, multi-jurisdictional operations and supply chains, this is by no means an insignificant task. Whilst the first phase of application will not be until 2027, many in-scope businesses are already taking steps to be CS3D ready. For further details on the CS3D see our briefing.

Whilst the EU is the leader in terms of introducing such extensive due diligence-based requirements, it is anticipated that others will follow and proposals for similar mandatory due diligence laws have already been raised in other countries, including the UK and South Korea. Life sciences businesses should therefore keep track of developments to understand how this will impact the scope and nature of their due diligence obligations across their international operations and supply chains.

Increased sustainability-related risk landscape

With increased public focus and expanding regulatory and reporting requirements, it follows that sustainability-related compliance risk is rising. 

One area of focus – which will not have escaped many in the industry – is the increasing risk of greenwashing claims. Fuelled by disclosure obligations and ESG-driven stakeholder focus, businesses continue to make statements relating to their ESG performance which can leave them exposed. Greenwashing risk can manifest in different ways, including through regulatory enforcement (for example, by competition or advertising agencies), litigation (including class actions) and, of course, there is the reputational damage which will be at the forefront of the minds of many decision makers. With this risk rising, businesses should ensure they have in place sufficient procedures to assess and verify statements which are to be made in relation to sustainability performance to mitigate against the potential risk.

Of course, sustainability-related regulatory, litigation and reputational risk extends beyond just greenwashing and there are a host of other potential ESG-related claims that we expect will fuel the current upward trend in class actions in the sector globally, including claims relating to climate change action.
Finally, we have also seen that regulatory and litigation environments are becoming increasingly hostile to so-called 'forever' chemicals (PFAS or per-and polyfluoroalkyl substances), commonly used in the life sciences sector, including in medical devices, active pharmaceutical ingredients, and pharmaceutical packaging. For further details on this emerging area of ESG risk, see our PFAS insight article.

Focus on the "s" factor

Recent years have seen "s" factors rise up the agenda. "S" is the 'social' element of ESG and relates to the wider relationship a business has with its surrounding environment. It encompasses a company's treatment of its employees, the communities in which it operates, and wider society. With the life sciences sector playing an important societal role – as exemplified by the Covid 19 pandemic, we expect to see further developments in a number of "S" areas relevant to life sciences, including product and patient safety, access and affordability, as well as data integrity (particularly in light of the growing use of AI in the industry). It will therefore be important for those operating in the sector to stay on top of these "s" related developments.   

Embedding sustainability into strategy and operations 

Against the backdrop of expanding regulation and risk, most major businesses have updated their internal policies, procedures, and processes to reflect ESG factors. There is no "one size fits all" approach and each business will require a tailored approach to suit its structure. However, we have seen the following themes developing:

• increasing emphasis on board level oversight with sustainability a recurring agenda item and a key consideration in strategy development; 
• an increased number of specialist committees across the range of sustainability-related topics; and
• a shift from centralised sustainability teams – often an initial reaction to sustainability's rise to prominence – with a move towards a decentralised, cross-functional approach with the integration of ESG specialists into different business functions (allowing for more robust identification of sustainability risks and opportunities for efficiency).

Conclusion

Keeping up with the pace of ESG-related developments and implementing processes to ensure compliance will continue to be a crucial part of operating any business in the years to come. This is especially true for the life sciences industry, which has a significant societal impact, extensive supply chains, and a well-recognized need to improve its environmental footprint. 

While navigating the rapidly evolving sustainability landscape presents a challenge to those in the sector, managing the risks whilst also embracing the opportunities will be key in securing business resilience and future growth. Being on top of developments and taking early action is essential, as we all work towards a more sustainable future.  
 

To assist our clients in navigating the complexity, our team prepare bespoke ESG-focused legal trackers for developments that occur in specific countries/regions in which businesses may take an interest. With our trackers, we work with you to not only stay ahead, but take the lead. Please contact Ernst Muller for more information.

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