How Does Pursuing ESG Measures Give My Medtech A Competitive Edge?
By Mark Ginestro and Jay Zhu, EY
Amid continuing focus on environmental, social, and governance (ESG) priorities among investors across every industry, sustainability is top of mind for the business community. Regulators are increasingly focusing on disclosures related to emissions and climate change. Sectors that rely heavily on global manufacturing and supply chain networks, such as medical technology, will be especially impacted by evolving expectations around carbon neutrality and other environmental concerns.
For these reasons, medtech companies — many of which have yet to meaningfully address their contributions to climate change — need to begin revisiting business models and developing new ESG strategies. Those that take this approach will find that accelerating their ESG ambitions can also provide an opportunity to lead on sustainability and build enterprise value in the process.
In March 2022, the Securities and Exchange Commission (SEC) proposed new disclosure requirements for public companies around climate-related information. This announcement was preceded by the Biden administration’s pledge to reduce greenhouse gas (GHG) emissions in the U.S. by half by 2030, with the intention of mitigating the impact of climate change on both human health and economic growth. One recent report indicates that the investor community is paying close attention to these developments, with ESG-related assets expected to reach $41 trillion by the end of 2022.
Against this backdrop, today’s healthcare industry remains highly carbon-intensive — by some estimates, responsible for more than 4% of global GHG emissions and 10% of total emissions in the U.S. In addition, approximately 80% of healthcare emissions are believed to be tied to supply chains. Given its reliance on single-use devices, increasing usage of digital and electronic components, and often complex global supply chain network design, the medtech sector is a significant contributor to healthcare’s outsized carbon footprint. In addition, the coronavirus pandemic has led to additional medical waste around personal protective equipment and other supplies.
The ESG Landscape For Medtech
For medtech companies, key focus areas for sustainability transformation include single-use plastics and devices, product packaging and recycling, manufacturing infrastructure and processes, and supply chain network design. While these areas present significant challenges, one growing solution — the reprocessing of medical devices — shows tremendous promise in both minimizing medical waste and driving enterprise growth for medtechs.
According to recent reports, reprocessing single-use medical devices can reduce hospital costs by as much as 50% and can cut ozone depletion by almost 90%. In addition, the reprocessed medical devices market in the U.S. is projected to grow at a compound annual growth rate of 15.7% from now until 2028, with market revenue expected to nearly triple during the same period.
For some leading medtech players, these benefits and opportunities are already far too compelling to ignore. As one example, Medtronic amplifies its sustainability targets through an annual performance report, investor briefings on ESG benchmarks, and other programs. In addition, Edwards Lifesciences has outlined its strategies to cut some emissions by nearly half and achieve carbon neutrality in the near future. From using more biodegradable materials to driving culture changes within the organization and more, the company is implementing a series of initiatives aimed at reducing its carbon footprint. “We’re really operationalizing it,” says one medtech CEO. “It’s not pockets of projects, but it’s becoming really embedded in the way that we run the company, which is really what it’s going to take to move things to the next level.”
Although some medtech and other life sciences leaders have embraced the changing tides around sustainability through comprehensive initiatives, many have not. For example, less than one third of the life sciences CEOs polled in our 2022 EY CEO Survey believe that becoming a sustainability leader will provide a competitive advantage, and only one third say their companies have sustainability key performance indicators (KPIs) in place to enable long-term value creation. In addition, 57% of respondents cited resistance from investors as a major roadblock to sustainable transformation amid concerns around costs.
However, despite these obstacles, industry leaders are thinking strategically about ESG issues. For example, they cited sustainability concerns as the top critical risk to their future growth strategies. In addition, nearly 80% of the life sciences CEOs we surveyed are now adjusting or planning to adjust their global operations or supply chains. Our survey also revealed that pursuing M&A as a means of boosting sustainability through acquired ESG expertise is a leading industry practice, with 55% of life sciences CEO respondents actively pursuing M&A in the next 12 months.
Medtech’s Path Forward
For medtech leaders contemplating the ESG agenda, the opportunities for advancement are two-fold. First, transforming the company’s own operating models and supply chain network designs enables greater compliance, efficiencies, and value. For example, sustainable manufacturing involves practices such as sharing capacity and infrastructure to reduce wastage. In addition, it’s important to reexamine supply chain partners to validate that their sustainability philosophy and practices are aligned with the company’s ESG mission and goals.
Second, as a leading partner to the healthcare industry, medtechs have an opportunity to share key insights around sustainability transformation and medical waste mitigation with hospitals and health systems. Given that the health industry itself is responsible for approximately 10% of annual carbon emissions in the U.S., this type of engagement has the potential to drive meaningful change in emissions reduction efforts as well as health equity, as marginalized communities often endure disproportionately high impacts from climate-related events. To begin preparing for the coming deluge of ESG regulations and building enterprise value around sustainability, we recommend the following actions:
- Define stakeholder expectations.
- Establish sustainability commitments and ambitions.
- Infuse ESG goals into organizational strategy.
- Create enterprise value through innovation and technology.
- Communicate outcomes through governance and disclosures.
- Share insights with customers and clients.
As the SEC’s proposed rules have laid bare, today’s ESG focus in the business world will continue to accelerate for the foreseeable future. From reducing the risks around climate change to improving health outcomes and driving both value and cost savings across the health and life sciences ecosystem, the benefits of developing long-term sustainability frameworks now are many for the medtech sector.
About The Authors:
Mark Ginestro, partner, EY-Parthenon, has over 25 years of experience advising life sciences companies in all facets of corporate development, including growth strategy, ESG strategy, M&A, and business model evolution. He holds a bachelor’s degree in engineering from the University of Michigan.
Jay Zhu, partner, EY-Parthenon, has nearly 20 years’ consulting experience providing strategic advice and implementation to medtech, pharmaceutical, and healthcare companies. Areas of expertise include strategy, M&A, business model transformation, value propositions, and commercial excellence. He holds an M.S. in industrial engineering from the University of Illinois Urbana-Champaign.
The views expressed by the authors are not necessarily those of Ernst & Young LLP or other members of the global EY organization