Task Force on Climate-related Financial Disclosures (TCFD)
Novartis supports the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). This is our third TCFD disclosure. It is based on updated TCFD guidelines published in October 2021.
We are committed to reducing the impact of our business activities on the environment, and have set clear targets covering climate, water and waste (see "Environmental sustainability"). These targets relate to both our own manufacturing operations and to our wider supply chain.
In 2022, we carried out an in-depth assessment of the company’s climate-related risks and opportunities. The results form the basis of this disclosure. While we believe our business strategy is well-adapted to current climate risks and opportunities, we continue to work to improve our approach where possible, particularly as it relates to risk management and governance of climate issues.
Governance
Board oversight
Ultimate responsibility for our climate strategy lies with the Novartis Board of Directors. The Board has delegated primary responsibility for climate strategy and governance, including progress on metrics and targets, to the Governance, Sustainability and Nomination Committee (GSNC). Climate-related topics were on the agenda at two out of three GSNC meetings in 2022.
In addition, several other Board committees have responsibilities that relate to environmental sustainability. These are:
- The Audit and Compliance Committee, which is responsible for internal controls and all compliance processes and procedures, including those related to climate.
- The Risk Committee, which oversees the company’s risk management (including both physical and transition climate risk).
- The Compensation Committee, which determines how environmental, social and governance (ESG) issues (including climate) should be incorporated into compensation plans for members of the Executive Committee of Novartis (ECN).
Several Novartis Board members have competence on ESG issues. We assess Board-level competence through criteria that include, but are not limited to, the following:
- Whether the respective Board member has comprehensive/expert understanding of ESG-related issues
- Whether the respective Board member has led a company/organization to adopt ESG goals or shape external sustainability leadership initiatives
For more information on the composition and expertise of the Novartis Board, please see our Annual Report.
Management oversight
The ECN, led by the Chief Executive Officer (CEO), is responsible for implementing the company’s climate strategy.
Environmental sustainability is included in the CEO’s Balanced Scorecard under the “Strategic Objectives” component, which is weighted at 40% of the annual incentive. Performance measures for other members of the ECN include emissions reductions targets where relevant for their area of responsibility.
The CEO chairs our ESG Committee, which oversees the company’s ESG strategy, including progress against our climate, water and waste targets. The ESG Committee meets every two months. Climate is included as a specific agenda item at least once a year. In 2022, it was discussed two times.
The Chief Ethics, Risk & Compliance Officer (CERCO) is responsible for ensuring climate risk is fully integrated into our Enterprise Risk Management (ERM) processes. The CERCO reports quarterly to the Risk Committee, including on climate-related physical and transition risks as appropriate.
The President, Global Health & Sustainability, is responsible for integrating ESG matters into the company’s business. The President, Operations, is responsible for leading the delivery of environmental sustainability targets.
An annual climate scenario analysis is carried out by the Environmental Sustainability Operations team, which updates both the ESG Committee and the Board at least once a year. Novartis also has an ESG Council and a Sustainability & ESG Office to further embed ESG priorities across the business.
Main governance and management bodies with climate-related responsibilities
Strategy
Climate issues are integrated into our strategy, business model and financial planning process. Environmental sustainability spans two of our strategic priorities: Embed operational excellence and Build trust with society1. It is also included in our materiality assessment (see "Embed operational excellence", "Build trust with society" and "Our material issues").
Financial planning
All capital projects over USD 20 million require a formal Environmental Impact Assessment (EIA) to determine possible impact on the climate and/or company exposure to climate risks. We also apply an internal shadow carbon price of USD 100 per metric ton in our strategic decision-making and financial planning.
In 2022, Novartis deployed approximately USD 30 million in capital expenditure on environmental projects to reduce consumption of natural resources, improve energy efficiency and adopt renewable energy solutions across our operations.
Material climate-related issues
Results from our 2022 scenario analysis show that: a) climate change potentially presents both risks and opportunities for Novartis, and b) the company’s current strategy and financial position remain resilient to the possible impact of climate change.
To conduct our analysis, we used the scenarios listed on "Physical and transition risks and opportunities", based on input from both the Intergovernmental Panel on Climate Change (IPCC) and the International Energy Agency (IEA). All risks and opportunities were assessed on a short-, medium- and long-term basis, in line with TCFD guidance.
Financial quantification
When assessing risks, including climate-related risks, Novartis defines the financial impact as the potential loss of annual sales, trade receivables or market share according to the following thresholds: <1% (insignificant); 1-2% (minor); 2-3% (moderate); 3-5% (major); and >5% (severe).
Results of 2022 scenario analysis
Our scenario analysis covered eight physical risks and thirteen transition risks and/or opportunities. Only the most significant items were carried forward for further quantitative analysis. These are set out in the table in "Physical and transition risks and opportunities". For purposes of comparison, impact is shown for the 2030 and 2050 time horizons only. Please note the physical and transition risks identified below all fall within the “insignificant” level of financial impact (i.e., less than 1% loss of annual sales, trade receivables or market share).
1 For reporting purposes, we cover the topic under “Embed operational excellence”
|
High emissions pathway |
Low emissions pathway |
Time horizons |
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|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Scenario analysis for physical risks1 |
IPCC SSP5-8.5: +4.4°C mean warming by 2100 (equivalent to RCP 8.5) |
IPCC SSP1-2.6: +1.8°C mean warming by 2100 (equivalent to RCP 4.5) |
2030, 2050 |
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|
Impact |
Description |
Potential 2030 financial impact |
Potential 2050 financial impact |
Risk treatment |
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Physical risks |
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Tropical cyclones |
Insignificant |
Potential financial implications through interruptions at our sites (e.g., property damage, equipment repairs) or via disruption to transport networks (e.g., delaying delivery of raw materials to sites or finished products) |
USD 16–18 million |
USD 25–43 million |
We have a resilient supply chain with a broad geographic footprint, dual supply for key products and adequate inventory level / stock policies. Our sites have physical infrastructure mitigation in place (e.g. shelters, flood defenses, building insulation, back-up generators), supported by administrative controls (e.g. emergency response / business continuity plans). We are also implementing energy efficiency initiatives across our operations to reduce energy demand and transition to renewable energy solutions. |
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Flooding |
Insignificant |
Flooding could lead to disruption or delays in manufacturing processes (e.g. through property and infrastructure damage or repairs, fresh-water availability etc.) and interruptions in product distribution. |
USD 70–80 million |
USD 35–95 million |
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Extreme heat |
Insignificant |
Extreme heat conditions could increase operating costs by augmenting our cooling needs and energy consumption to ensure processes and equipment operate efficiently. |
USD 6–10 million |
USD 9–19 million |
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Water stress and drought2 |
Insignificant |
Water stress and drought could potentially impact our operating costs through higher water prices, and/or a need to source water from alternative suppliers. This may also impact revenue by reducing efficiency or causing a shutdown of water-intensive production processes. |
USD 250 000 – 940 000 |
USD 470 000 – 1 million |
Sites have water management programs in place, including measures for reusing, recycling and storing water |
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|
High emissions pathway |
Low emissions pathway |
Time horizons |
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Scenario analysis for transition risks and opportunities |
IEA STEPS: +2.6°C average temperature rise by 2100 |
IEA NZE: +1.5°C average temperature rise by 2100 |
2025, 2030, 2040, 2050 |
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Impact |
Description |
Potential 2030 financial impact |
Potential 2050 financial impact |
Risk treatment |
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Transition risks |
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Carbon price |
Insignificant |
Carbon prices are likely to increase further across major operating countries. This may increase our future operating costs. |
USD 4–22 million in additional annual carbon costs |
USD 5–53 million in additional annual carbon costs |
Reducing emissions as part of our environmental sustainability targets will limit exposure to carbon pricing. |
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Net-zero healthcare systems |
Insignificant |
Requirements to rapidly decarbonize may drive up capital expenditure (while failure to decarbonize may threaten the company’s license to operate in certain countries). |
USD 26–873 million in annual revenue classified as “at risk” 3 (i.e. related to markets with more ambitious net-zero targets than Novartis). |
For the most part, our net-zero targets are aligned with health system goals. In our key markets our net-zero commitment will require us to decarbonize at a faster rate than required. “At risk” revenues relate to a relatively small, low-footprint region. |
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Transition opportunities |
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Circular economy |
Insignificant |
We may face potential increases in operating costs driven by higher plastic prices/ taxation imposed by countries. However, this is also an opportunity for Novartis to switch away from “virgin” (non-recycled) plastic |
USD 21–60 million in savings4 (from avoidance of increasing plastic costs) |
USD 10–120 million in savings4 (from avoidance of increasing plastic costs) |
We will reduce exposure to prices as we move closer to our plastic-neutral goal, particularly in advanced economies where plastic is being phased out or replaced by recycled materials. Risk will be entirely mitigated by 2030 if company goals are met. |
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Energy source |
Insignificant |
Impact of rising fossil fuel prices may be avoided by switching to more sustainable sources (particularly in replacing natural gas for heating with electricity). |
USD 70–230 million in annual savings (by reducing proportional use of natural gas for heating) |
USD 80–320 million in annual savings (by reducing proportional use of natural gas for heating) |
We will minimize exposure by increasing our use of clean energy in heating and other infrastructure investments. |
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Risk management
In addition to our scenario analysis, climate risks are also in scope of our Enterprise Risk Management (ERM) framework, which ensures a consistent approach to risk assessment and treatment across our business.
Risks are identified through annual risk workshops and periodically reviewed. Our Sustainability & ESG Office takes part in this process to ensure environmental and climate risks are considered.
The outcomes are consolidated into the Novartis Risk Compass, which is a categorization and visualization of Novartis top risks by grouping them into Strategic Risks, Operational Risks, Emerging Risks and Awareness Topics, comprising a selection of the top three items for each category (see "Ethics, risk and compliance"). Climate is captured primarily under the following two risks:
- Environmental, social and governance matters: a strategic risk defined as failure to meet environmental, social and governance expectations
- Climate change: an emerging risk defined as impact of climate change and increased risk of major natural disasters
Risks are assessed based on their potential impact and likelihood over the next five years, using the “most probable worst-case” scenario as a reference point. These are the same criteria used for other enterprise risks. To ensure alignment, our scenario analysis applies similar definitions for likelihood and impact. Senior managers across the business also provide input as part of our risk assessment.
We take measures to avoid risks or reduce the risk exposure, where appropriate; these measures are determined by our risk appetite. We continually monitor risk and, if needed, periodically review our assessment and/or measures to be taken. The table below summarizes the outcome of our 2022 risk assessment for our two climate-related risks.
In 2023, we will explore ways of further integrating the scenario analysis into our company’s ERM framework.
Risk |
Description |
Risk category |
Risk rating |
Risk treatment |
|---|---|---|---|---|
Environmental, social and governance issues |
Failure to meet environmental, social and governance expectations |
Strategic |
High |
See “Strategic risks in focus” for details |
Climate change |
Impact of climate change and increased risk of major natural disasters |
Emerging |
Medium |
We have prepared global incident plans for specific types of events (e.g., earthquakes, flooding) which are available for local adaptation and specification. |
Metrics & targets
We use various climate-related metrics and set targets relating to carbon emissions, water consumption, waste, and plastic use. See "Environment performance indicators" for a list of our metrics and "Environmental sustainability" for details of our environmental sustainability targets.