SBTi pledges poised to reduce carbon emissions from biopharmaceutical supply chains
Scope 3 commitments of large biopharmaceutical companies
Introduction
Rising global temperatures, if unabated, are projected to cause catastrophic impacts on human health and welfare according to an Intergovernmental Panel on Climate Change (IPCC).. In response to this threat, world governments committed to curbing global temperature as part of an international treaty known as the Paris Agreement. Among other terms of the treaty, the parties agreed to limit global temperature rise to well below 2°C above pre-industrial levels and pursue efforts to limit warming to 1.5°C.
Since then, numerous organizations have emerged to support attainment of the Paris Agreement and related climate goals. One of those is the Science Based Targets initiative (SBTi), a program that currently has more than 4,200 participating companies.
The purpose of this post is first to introduce readers to the SBTi and then to examine science-based targets (SBTs) directed reducing toward greenhouse gas (GHG) emissions from the supply chain of a company, an action that has the potential to be particularly important for slowing accumulation of heat absorbing gases in the earth’s atmosphere. The post focuses on large biopharmaceutical companies that participate in the SBTi.
Science Based Targets initiative
The SBTi is one of several voluntary decarbonization programs created to support attainment of the Paris climate goals. The initiative is a collaboration of the Carbon Disclosure Project, the United Nations Global Compact, World Resources Institute, and the World Wide Fund for Nature. The goal of the SBTi is to help companies lower their GHG emissions by amounts that align with the Paris Agreement.1
As of January 2023, more than 4,200 organizations have been admitted into the SBTi program. To join the SBTi, a company must commit to reducing their greenhouse gas (GHG) emissions by at least 4.2% per year for the next 5 to 10 years. That rate and time period corresponds to a cumulative reduction of 20% - 40% over the next decade. This target level of decarbonization is based on global change analysis modeling conducted by the IPCC. The science behind these science-based targets is interesting in itself and I will explain it in a future post. But for now, keep reading to learn about about the types of GHG emissions included in the SBTi and implications for the biopharmaceutical industry supply chain.
Types of GHG emissions
A greenhouse gas is any gas that absorbs heat, also known as infrared energy, in the atmosphere. The primary greenhouse gases are carbon dioxide, methane, nitrous oxide, and various gases composed of hydrogen and fluorine. Carbon dioxide emissions mainly result from combustion of fossil fuels such as coal, heating oil, gasoline, and natural gas. The major sources of methane emissions include livestock, oil and gas operations, landfills, and wetlands. For nitrous oxide, its principal emission sources are fertilizer used in agriculture and combustion of fossil fuels. And finally, fluorine-containing gases are primarily released from various types of cooling or refrigeration systems, either as a leak or during disposal.
The numerous sources of GHGs mentioned above are divided into two categories - direct and indirect - for purposes of attributing emissions to a particular organization or activity. These categories are described in the two following sections.
Direct emissions
Direct GHG emissions are releases of carbon dioxide, methane, and other gases with global warming potential from sources owned or controlled by a company. Direct GHG emissions are also referred to as Scope 1 emissions. They are illustrated by the teal-colored arrow in the figure below.
As shown in the figure, Scope 1 emissions are associated with company facilities and vehicles. Common causes of Scope 1 emissions are combustion of natural gas, heating oil, coal, and other fossil fuels on company property. Scope 1 emissions also include emissions from company controlled vehicles powered by internal combustion engines. An important but less prevalent type of Scope 1 emission is release of commercial gases that trap heat in the earth’s atmosphere; some examples are anesthetic gases like nitrous oxide and industrial gases like nitrogen trifluoride.
Indirect emissions
Indirect emissions are releases of GHGs from sources upstream and downstream of a company that theoretically would not occur but for operations of the company. They are divided into what are known as Scope 2 and Scope 3 emissions.
Scope 2 emissions
Scope 2 includes emissions arising from purchased electricity, heat, steam, or cooling powered by fossil fuel combustion. They are illustrated by the grey arrow and icon for an electrical plug shown in the figure above. A common example of Scope 2 is carbon dioxide released to the atmosphere from combustion of coal or natural gas at electric generating stations that supply regional power grids, utilities, and ultimately end-use businesses and other consumers.
Scope 3 emissions
Scope 3 refers to GHG emissions that occur upstream and downstream of a company other than purchased energy. These emissions are illustrated by the purple arrows in the figure above. Upstream Scope 3 emissions are primarily attributable to a company’s supply chain, while downstream emissions primarily involve consequences of goods and services provided by a company.
Some typical upstream components of Scope 3 emissions are:
Purchased goods and services: this includes emissions associated with the production of raw materials, packaging materials, and supplies used in manufacturing processes.
Capital goods: This includes emissions associated with the construction, maintenance, and operation of buildings, facilities, and equipment used in manufacturing processes.
Upstream transportation and distribution: This includes emissions associated with the transportation of raw materials and finished products from suppliers to manufacturing sites.
Some typical downstream components of Scope 3 emissions are:
Use of sold products: This includes emissions associated with the use of the pharmaceutical products by patients, such as energy use for refrigeration and disposal of packaging materials.
End-of-life treatment of sold products: This includes emissions associated with the disposal of pharmaceutical products by patients, such as unused medications and packaging materials.
Note that these are just examples and the actual Scope 3 emissions for any given biopharmaceutical company will vary depending on its specific operations and supply chain. In order to quantify their Scope 3 emissions, companies must consider their entire value chain, from the sourcing of raw materials to the disposal of their products by the end user. Approaches to quantifying Scope 3 emissions will be the subject of a separate post.
Having now introduced the SBTi and the applicable types of GHG emissions, I next describe the role of the biopharmaceutical sector in the initiative, with a focus on Scope 3 emissions.
Biopharmaceutical participation in the SBTi
As of this post, 88 biopharmaceutical companies have joined the SBTi including 9 of the 10 largest. Each of these companies follow the five-step process outlined in the figure below. The process begins with a commitment to set a science-based target and ends with annual disclosures of progress until the target is reached. We will soon release a post that outlines the steps to follow when setting science-based targets.
Scope 1 and 2 decarbonization commitments
Scope 1 and Scope 2 SBTi targets for a selection of large biopharmaceutical companies are summarized in Table 1. Nine of the twelve companies shown in the table have science-based targets approved by the SBTi, while the remaining three companies committed to setting a target, with the actual targets pending.
Let’s walk through the table using the entry for Pfizer as an example. Reading the first through fourth column of the table from left to right, Pfizer committed to a 46% reduction of Scope 1 and Scope 2 emissions by 2030 from a baseline year of 2019. Moving down one row in the table, you can see that AbbVie is in the process of setting science-based targets for its Scope 1 and Scope 2 emissions.
As also shown in the table, combined Scope 1 and Scope 2 decarbonization targets for these twelve companies range from 34% for GlaxoSmithKline to 98% for AstraZeneca. The timeframes differ among the companies too. For example, GlaxoSmithKline committed to reaching its target by 2025 while Biogen set a target date of 2032. The variation in decarbonization targets and dates reflects numerous factors such as availability of renewable sources of electricity.
As shown in the right-most column the table, most of the reductions are equivalent to the minimum annual linear rate of 4.2% established in 2019 by the SBTi. Other companies committed to larger rates of reduction. For example, AstraZeneca pledged to lower its absolute Scope 1 and Scope 2 GHG emissions by 98% by 2026 from a 2015 base year, which is equivalent to a linear rate of 8.9% per year.
Notably, the Scope 1 and Scope 2 commitments shown in the table pertain to absolute GHG emissions rather than emissions scaled to the size of the company. Absolute emission reductions also stand in contrast to carbon offsets, a topic for a separate post. The focus on absolute GHG emissions is a requirement of the SBTi program. This characteristic of the initiative is intended to ensure that achieving the targets yields a net reduction in a company’s GHG emissions, not simply neutralization by investment in wind or solar power generation elsewhere, or natural sources of carbon sequestration like conservation land management.
Scope 3 decarbonization commitments
In addition to making Scope 1 and Scope 2 commitments, some of the biopharmaceutical companies that participate in the SBTi pledged to lower their Scope 3 emissions as well. These commitments are important because Scope 3 accounts for at least 80% of total GHG emissions from the biopharmaceutical industry.
Many of the Scope 3 commitments are quantitative targets for supply chain spend on partners that have SBTi targets. As shown in Table 2, four large biopharmaceutical companies pledged that by as early as 2025 at least 64% of goods and services in their supply chains will be purchased from suppliers that have science-based targets.
An example of SBTi Scope 3 targets
Let’s take a deeper look at Scope 3 targets using information reported by AstraZeneca as an example.
For 2021, AstraZeneca reported 6.0 million tonnes of carbon dioxide equivalent (CO2e) Scope 3 emissions. That amount accounted for more than 90% of total GHG emissions in 2021.
In the same report, AstraZeneca also stated that purchased goods and services accounted for 75% of its 6.0 million tonnes of Scope 3 emissions. Spending on purchased goods and services that year was $22.2 billion.
As shown in Table 2 above, AstraZeneca voluntarily pledged to influence emissions from suppliers of its purchased goods and services. Specifically, AstraZeneca made an SBTi commitment that supply chain partners responsible for 95% of its spend on purchased goods and services and capital goods would have SBTs by 2025.
This commitment is notable in that AstraZeneca does not control the operations of its supply chain partners. However, this target also suggests that AstraZeneca has a collaborative relationship with its business partners and has certain values in common.
AstraZeneca’s Scope 3 pledge appears to be having the intended effect so far. According to its most recent sustainability report, the proportion of its supply chain partners with an SBTi target increased from 0% in 2020 to 7% in 2021 and 14% in 2022.
Assuming total spend in this category of approximately $22 billion annually, the company purchased approximately $3.1 billion of goods and services from companies with SBTi targets in 2022. While laudable, that amount will need to increase 6-fold to 7-fold by 2025 for AstraZeneca to achieve its SBTi Scope 3 commitment.
Implications for the biopharma supply chain
Large biopharmaceutical companies that make SBTi pledges to lower their Scope 3 emissions are encouraging, or perhaps tacitly requiring, organizations in their supply chain to also participate in the program. The reasons for them to leverage their buying power in the marketplace are readily apparent - large biopharmaceutical companies want to be viewed as leaders of a sustainable and healthy global economy and supply chains account for the vast majority of their total GHG emissions.
Considering that the biopharmaceutical industry has a total market cap of $5.1 trillion, these supply chain commitments could likely cause many suppliers to soon set science-based targets for decarbonization through the SBTi. Adoption of science-based targets could have observable effects on financial indicators of a company. For instance:
Decarbonization can increase efficiency of operations by eliminating waste and stimulating innovation.
Solar and wind power are proving to be available at lower cost than power from coal and natural gas-fired plants and have the potential to improve a company’s bottom line.
Improved efficiency and lower costs often translate to increases in corporate valuations and attract investment.
Positive spillover effects could occur as well because new or expanded processes that lower GHG emissions will also generate new jobs and workforce training programs.
Closing remarks
The trend toward decarbonization in the biopharmaceutical industry appears to be strong. This observation indicates that many companies treat sustainability as a core component of their operations and likely invest accordingly in due diligence and continuous improvement.
Time is of the essence for businesses and their host countries to: (1) do their part in reaching temperature targets established in the Paris Agreement, (2) capitalize on emerging climate-related opportunities, and (3) mitigate impacts of climate change on their operations.
Because Scope 3 emissions are the largest component of total emissions for many enterprises, active engagement on decarbonization with supply chain partners can be an especially impactful way for companies to leverage their investments in sustainability.
Looking ahead
Our next post on the SBTi and biopharmaceutical companies will discuss a roadmap that organizations in the biopharmaceutical sector supply chain can follow to develop science-based targets through the SBTi. In the meantime, we will keep an eye on the rate of new biopharmaceutical entrants into the SBTi.
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Visit the SBTi website for more information on the program.