HNU Healthcare Management Insights #21

What is meant by “ESG”?

Manuel Schaaf: The abbreviation ESG stands for Environmental, Social and Governance and refers to a framework for evaluating the sustainable actions of companies. The United Nations Bruntland Commission defines sustainability as development that meets the needs of the present without compromising the needs of future generations.

What relevance does ESG have in the healthcare sector, especially in the medical device industry?

Manuel Schaaf: The healthcare sector, including medical technology companies, has a significant impact on the environment. The healthcare sector is a major source of greenhouse gas emissions and therefore plays a crucial role in reducing them. Overall, around 5% of the global ecological footprint is attributable to organizations in the healthcare sector.
Social responsibility is the foundation of the healthcare sector. Climate change leads to an additional 250,000 deaths each year, highlighting the urgency of tackling social and environmental challenges. Another key aspect is the accessibility of healthcare services, as access to healthcare is crucial for public health. Ultimately, strong governance is particularly important in the medical technology industry, as the products of these companies directly affect people's lives. Companies must ensure that their business processes are ethical and responsible in order to gain and maintain the public's trust.

Welche Gesetze und Richtlinien sind für ESG von besonderer Bedeutung?

Which laws and guidelines are of particular importance for ESG?

Manuel Schaaf: The importance of ESG laws and guidelines has increased significantly in recent years in order to increase sustainability and responsible corporate behavior. The most important legal regulations include the Corporate Sustainability Reporting Directive (CSRD), the EU Taxonomy, the Supply Chain Duty of Care Act (LkSG) and the Corporate Sustainability Due Diligence Directive (CSDDD).

• The CSRD extends the reporting obligations of companies with regard to sustainability aspects and applies to large companies and capital market-oriented SMEs in the EU. The increased transparency puts investors and other stakeholders in a better position to make sustainable decisions.
• The EU taxonomy, which is a classification system that evaluates economic activities according to their environmental impact and serves as a central instrument to support CSRD, can be identified as a central instrument to support CSRD. It helps companies to structure and quantify their sustainability reports and makes it easier for investors to recognize sustainable economic activity.
• The German Supply Chain Duty of Care Act (LkSG) obliges companies to comply with human rights and environmental obligations along their supply chains. It requires companies to identify risks and take appropriate measures to avoid or reduce them.
• The CSDDD supplements the requirements of the LkSG at EU level and promotes holistic sustainable corporate governance.

What opportunities and challenges are associated with ESG for medical device companies?

Manuel Schaaf: The legal regulations are of crucial importance for the implementation of ESG measures. However, major investors, including Blackrock, are now also paying close attention to sustainable corporate governance, particularly in terms of climate risk management and long-term value creation. This trend has led to ESG investments exceeding 17.5 trillion dollars worldwide. Companies themselves are also recognizing the urgency to act, as environmental and climate risks are increasing rapidly. Climate change is the biggest global risk and could cause losses of 178 trillion dollars between 2021 and 2070. Measuring emissions across the value chain is therefore essential to manage environmental issues and respond to supply chain disruptions and natural disasters. In addition, two thirds of employees prefer an employer that pays attention to sustainability. Furthermore, 90% of Generation Z consumers are willing to pay 10% more for sustainable products.

One challenge for sustainability reporting and compliance is data collection, as accurate measurement of sustainability metrics requires consistent and reliable data. Only 31% of respondents within the Assent in 2023 study stated that they have high confidence in the quality and accuracy of their company's supply chain data. Furthermore, the short-term business focus inhibits the sustainable focus of medtech companies by ignoring the risks of resource depletion, making it difficult to adopt the circular economy and neglecting the long-term environmental impact. Although 19 of the 20 largest medical technology companies have set themselves targets to reduce their CO2 emissions, only 40 percent also include emissions from consumers and suppliers. However, it is precisely these so-called Scope 3 emissions that cause the majority of emissions.

What measures have medical technology companies implemented in the area of ESG?

Manuel Schaaf: Medical technology companies are implementing a variety of measures to improve their sustainability. A key step is the establishment of processes for data collection and evaluation, especially for Scope 3 emissions, which account for around 70% of emissions. Companies generally use life cycle assessments to evaluate the environmental impact of their products and take measures to increase energy efficiency and reduce waste. The use of renewable energies such as solar and wind energy and energy-efficient operations management play an important role in practical implementation. In addition, a targeted attempt is being made to reduce CO2 emissions in the supply chain through environmentally-oriented procurement.

One example of this is the company B. Braun, which is significantly reducing the consumption of resources in its dialysis centers as part of its “Green Dialysis” program, which can lead to savings of more than one million liters of water per year. As a further measure, the company relies on CO2-neutral energy generation through geothermal energy in its production facility in Sempach, which can save around 100,000 liters of heating oil per year.

Thank you very much for the interview!