Life Sciences Companies with Operations in EU Could Be Affected by ESG Law

EU member states are beginning to implement EU environmental, social, and governance (ESG) legislation into national law, meaning life sciences companies will need to look at its impact on their global supply chains, including for APIs. Michele Tagliaferri, Anna-Shari Melin, and Nadja Schwarz explain.

The EU’s Corporate Sustainability Due Diligence Directive (CS3D) – which requires life sciences companies in the EU or with operations in the EU to consider the human rights and environmental impacts of their subsidiaries and supply chains – initially seemed poised for easy approval by the European Parliament and Council. However, on 9 February 2024, the approval vote was postponed.  The next steps are unclear, but the adoption of CS3D is at this stage uncertain.

Despite these delays, it is important for life sciences companies to continue their preparations for the CS3D, particularly because some EU member states have already enacted national legislation anticipating the requirements of the CS3D. Notable among these is Germany.

On 1 January 2024, the provisions of Germany’s 2023 Supply Chain Due Diligence Act, or Lieferkettensorgfaltspflichtengesetz (the LkSG), were expanded to require all companies with more than 1,000 employees in Germany – the former threshold was 3,000 employees – to conduct due diligence aimed at identifying, preventing, or minimizing risks of violation to the environment and human rights in their global supply chains.

This change affects both subsidiaries of foreign companies based in Germany and German companies and which have 1,000 or more employees. The LkSG also provides a good template of the human rights and environmental risk analysis and due diligence that companies will be ultimate be required to conduct under the CS3D across the EU.

The key obligation of the LkSG is that companies should establish a risk management system to identify, prevent, or minimize the risks of human rights violations and damage to the environment along its supply chain. There are significant fines of up to 2% of annual global revenue for failures to do so. Its obligations include:

• Appointing a human rights officer to monitor risk management.
• Once a year, or on an ad hoc basis, if needed, preparing a detailed analysis of the corporate supply chain to identify potential risks related to human rights and environmental concerns.
• Taking immediate appropriate preventive measures to respond to risks identified during the risk analysis by issuing a policy statement on corporate human rights strategy and implementing necessary measures to mitigate and prevent human rights violations and environmental harms.
• Establishing a transparent and accountable complaint mechanism for the reporting of violations.
• Publishing an annual report on identified human rights and environment-related risks, the measures taken, impact assessments, and conclusions drawn.

Life sciences companies face particular challenges when analyzing the human rights and environmental impact of their supply chains. Many of the raw materials and active pharmaceutical ingredients (APIs) used in drug manufacturing are extracted from, or manufactured in, developing economies which may not have adequate levels of protection for human rights and the environment.

Life sciences companies that are looking at their supply chains afresh in light of the expanded scope of the LkSG and the advent of CS3D will need to consider a broad range of environmental and human rights issues, including:

• The emissions created by third parties when manufacturing their APIs.
• How the waste produced by the manufacturing of their APIs is being processed, particularly if it contains hazardous solvents which can contaminate water and impact biodiversity. The use of highly active or cytotoxic substances can lead to new monitoring and documentation obligations.
• The impact on biodiversity caused by the way in which their raw materials are harvested from the natural world by third parties.
• Occupational safety and health obligations along the supply chain.
• Equal treatment in employment on the grounds of national and ethnic origin, social origin, health status, disability, sexual orientation, age, gender, political opinion, religion or belief, and adequate equal living wage.
• How to conduct clinical trials in a way which ensures heterogeneity of patient responses in the populations that suffer from the disease.
• The potential environmental impact of excipients – which are often of animal or vegetable origin – used in manufacturing their drugs.
• The emissions from the logistics of transporting their raw materials, APIs, and drugs.

In addition to considering the above, life sciences companies with operations in Germany should assess whether they are within the scope of the LkSG as of 1 January 2024. Implementing a risk management system is an ongoing process involving a series of procedural steps that must be carefully planned and executed, so advanced planning is needed.

This post is as of the posting date stated above. Sidley Austin LLP assumes no duty to update this post or post about any subsequent developments having a bearing on this post.