New EU directive will require UK businesses trading with the EU to enforce ESG compliance within their supply chains

In anticipation of the European Union’s new supply chain law, the healthcare sector is demonstrating resolve: Most companies have already taken steps to comply with the recently enacted EU Corporate Sustainability Due Diligence Directive (CSDDD), according to a survey conducted by supply chain experts INVERTO, part of the Boston Consulting Group.

LONDON, May 16 – 84% of companies active in the pharmaceutical and healthcare sector view the EU Corporate Sustainability Due Diligence Directive as an opportunity to align human rights and environmental protection with their business objectives. This new directive will require firms with a turnover of over €450m and more than 1,000 employees to publish detailed information regarding sustainability and human rights throughout their supply chains – and adopt effective policies to ensure compliance.

UK healthcare and pharmaceutical companies with European clients or operations within the bloc will need to ensure that their operations comply with the new directive. Otherwise, European clients might have to decline cooperation with suppliers who do not comply with the new regulation.

Some of the potential human rights and environmental risks that exist within the pharmaceutical sector and its supply chains include:

• Unethical labor practices, particularly for suppliers in emerging markets
• Improper disposal of unused medicines, patient use, and discharges from drug production resulting in the release of active pharmaceutical ingredients (APIs) into the environment, impacting wildlife and biodiversity

An Opportunity with Costs — But Also Expected Returns

Overall, 74% of these companies believe that compliance with the directive is achievable and have already implemented measures. These include developing compliance procedures (77%), issuing an annual financial report (69%), collaborating with other companies in the same sector (63%), and monitoring performance indicators (63%).

82% of the survey participants anticipate that the CSDDD will incur costs, though most anticipate these to be low or moderate. In the long run, 60% believe that the financial impact will be positive and anticipate a return on investment.

Beyond the financial aspect, many respondents also see positive momentum from the enactment of the law: for example, stricter regulations could have a positive impact on their image (55%) and promote respect for human rights (55%). Other important reasons for implementing measures include greater environmental responsibility (51%) and improved relationships with customers and other stakeholders.

47% of respondents from the healthcare and pharmaceutical sector view financial performance as the main task of procurement. Only 18% prioritize improving the environmental and social impact of supply chains - 13% less compared to all surveyed companies.

Challenges in Implementation

Many survey participants from the healthcare sector are skeptical about the practical implementation of the measures, citing lack of capacity (25%) and unclear directive guidelines (20%) as major challenges. However, 74% of healthcare companies are confident that compliance is achievable for their business. Over 40% of respondents highlight the need for better training for employees in procurement and supply chain management, 9% more than in other sectors.

“With the upcoming implementation of the CSDDD, companies in the Healthcare sector have a real opportunity to tackle ESG issues in their supply chain to better serve their patients and partners. UK healthcare businesses with international operations will need to plan and consider how best to align their operations with the rest of Europe in line with the new directive, and this is where Procurement comes in," explains Sabrina Morton, Principal at INVERTO and UK Healthcare Sector Lead.

Procurement plays a significant role in making this happen. By proactively embedding new initiatives into the procurement ecosystem that enhance transparency and resilience, such as tracking ESG KPIs across the supply network, diversifying supplier portfolios and spearheading more robust contracting excellence, companies will find it easier to comply to the CSDDD. Organizations should actively request missing data from their suppliers and adjust their processes accordingly and uplift the capabilities of their teams in place to ensure all those accountable are contributing to these changes. This is increasingly important as UK-based companies look to align their supply chains across the continent.

"By creating transparency, companies can identify new opportunities for cost savings, reallocate resources and embed new processes to foster further compliance. This enables operational efficiency, promoting innovation and competitiveness," says Sabrina Morton.

Study Design

The new EU Supply Chain Law affects all companies operating in the European Union with more than 1,000 employees and an annual turnover of over €450 million. Depending on the size of the company, different start dates are planned. INVERTO surveyed over 680 decision-makers from B2C and B2B companies with more than 500 employees, including 74 participants in the healthcare industry. The survey was conducted in November and December 2023. Interested parties can download the results here: www.inverto.com/study-supply-chain-law

About INVERTO

As an international management consultancy, INVERTO is one of the leading specialists in strategic procurement and supply chain management in Europe. The consultancy supports companies from strategy development to implementation and accompanies them in the digitalization of procurement. As a subsidiary of the Boston Consulting Group, INVERTO identifies and realizes the potential for process optimization and cost reduction for its clients and supports the establishment of resilient supply chains that meet sustainability criteria. In comprehensive transformation projects, INVERTO is the trusted partner for improving the performance of the procurement organization.

INVERTO has over 500 employees in 14 locations in 11 countries. The diverse, international teams have in-depth expertise in various industries and functions. Clients include international corporations and mid-sized companies across all industries, as well as the world's leading private equity firms.

For more information, please visit www.inverto.com/en/