No, Strict Environmental Rules Do Not Harm Global High-Tech Firms Competitiveness

(MENAFN- The Conversation) Offhand, you may not think of the Pharmaceutical and biotech industry as the greenest one around. The sector makes heavy use of chemicals and solvents, not to mention large amounts of water, and its complex supply chains sprawl worldwide.

The result is a hefty carbon footprint, according to our research . The healthcare industry's net emissions (nearly a third of which come from the pharmaceutical industry) are estimated to account for 4.4% of global emissions , and if left unchecked, the figure will triple by 2025.

No wonder businesses are under pressure to go green. Innovative technologies such as biotechnologies, which substitute biological processes for artificial chemical reactions, are often seen as the solution to sustainability problems . Indeed, 80% of the most cutting-edge pharmaceutical companies have committed to net-zero goals by 2050 and many others have developed radical plans to reduce greenhouse gas emissions. Novartis aims to achieve carbon neutrality within its operations by 2025 and reach net-zero greenhouse gas emissions across its whole value chain by 2040 . Danish giant Novo Nordisk has also committed to the cause , pledging to achieve net-zero emissions across its entire value chain by no later than 2045.

But will they walk the talk?

The answer to that question is increasingly being decided by government.

For a start, as per new European rules applicable to all firms, pharma and biotech firms are required to practice what we call materiality reporting, which entails disclosing their environmental and societal effects and acknowledging the financial risks associated with sustainability concerns. In addition, Big Pharma is in the crosshairs of the EU, which has developed a unique strategic plan for the pharmaceutical industry to reduce its environmental impact. This includes a proposed EU-wide ban on over 10,000 per- and polyfluoroalkyl substances (PFAS) favoured by the sector, also known as 'forever chemicals'.

Other major markets such as Japan and China are continuously updating their environmental protection laws, although environmental policies vary greatly among other countries in the Asia-Pacific region. For example, since 2022, Japan requires domestic companies to annually disclose a broad spectrum of environmental information . Meanwhile, China has also introduced new Environmental Social and Governmental (ESG) disclosure rules for major companies to align with global standards, particularly European requirements .

Although environmental policies in these countries are not specifically tailored for the pharmaceutical and biotech industries, they significantly impact these sectors, underscoring the far-reaching effects of broader environmental regulations. The United States, however, tend to lag behind other developed countries in enforcing environmental standards, partly as a result of the Trump administration loosening regulations.

So, are such constraints likely to be detrimental to firms' global strategies? Managerial and corporate rhetoric tends to claim that strict environmental standards have a negative impact on the global competitiveness of EU multinationals.

Instead, at odds with this commonly-held view, we found that compliance with strict environmental rules does not harm the competitiveness of high-tech multinationals. In fact, our observations suggest the opposite: higher levels of globalization are often associated with a heightened focus on environmental sustainability.

We reached this conclusion by collecting extensive data on 195 leading companies in the pharma and biotech industry listed in the European Scoreboard Database , which ranks the top 2,500 Research & Development spenders. This elite group's dedication to intensive R&D investments not only shows their commitment to spurring innovation in healthcare but also hints at a broader trend towards sustainability. Leveraging cutting-edge technologies from their R&D endeavours, these companies are strategically positioned to address complex environmental challenges within their industries .

Our study compared companies' global reach and geographic sales across regions spanning the Americas; Europe, Middle East, Africa (EMEA) and the Asia Pacific (APAC) on the one hand; and their environmental performance, on the other. The latter focused in particular on their Environmental, Social, and Governance (ESG) scores related to environmental criteria.

What we observed was that pharma and biotech multinationals with a global strategy – ie. generating at least 20% of revenues from each region, but less than 50% from one region – specifically exhibit the highest levels of environmental performance. This association between corporate globalization and environmental performance was found regardless of the environmental stringency of the region or country of origin.

Our explanation is simple: Environmental laws and regulations serve as key incentives for multinational companies to support green innovation, ultimately paving the way for their global expansion. In other words, strict environmental standards are not incompatible with global ambition – rather the contrary.

When looking at each region separately though, we observed some nuances. In the Americas, the top 5 companies (including Merck US and Johnson & Johnson) tended to follow a“home strategy” focused on their home region, despite their high environmental performance, likely because of the ample size of the US market, large enough for companies not to venture farther. In the other regions, globalization is one of the most adopted strategies (for instance by British giant AstraZeneca in EMEA and Japanese Takeda Pharmaceutical in APAC).

It once again affirms the role of sustainability for companies to maintain their competitiveness in the global market. Still, the home region strategy – whereby companies draw at least 50% of their revenues from their region – is observed to be another favourite one for the top sustainable companies. Although the more rigorous rules impose costs on operations, innovation is believed to make the business run more efficiently, offsetting this cost.

The conclusion will no doubt comfort activists and policy-makers, while reassuring the corporate world: Environmental laws and regulations are crucial motivators for multinational corporations to encourage green innovation and, in doing so, maintain their worldwide competitiveness.

On the academic side of things, our observations open new avenues for future research. For instance, the large adoption of the host region strategy by companies in some key countries such as Japan, China, Denmark and Ireland, where green standards are high, opens the question of how the regulations in the host region, compared with those in the home region, might affect the adoption of their globalization development strategy.

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