Annual Report 2024

Strategy

Climate-related risks and opportunities

Climate-related risks encompass potential challenges that PolyPeptide may face because of the changing climate and associated environmental, economic, and social responses. These risks can affect operational continuity, financial performance, and strategic positioning.

In line with the TCFD recommendations, climate-related risks are defined as physical risks (chronic, acute) and transition risks (policy and legal, technology, market, and reputation).

Figure 1: Physical and transitional risks

Approach and assessment

Physical risks

For assessing climate-related risks, PolyPeptide used a quantitative as well as qualitative approach including different scenarios also applied by the Intergovernmental Panel on Climate Change (IPCC). For the assessment of physical risks, PolyPeptide used the Munich Re Location Risk Intelligence Tool, which evaluates numerous risks and possesses a high spatial resolution, and the support of external consultants from the Climate&Strategy Foundation.

Scenarios

The IPCC released its 6th assessment report in 2023, which redefined the forefront of climate change modeling. Previously, climate change scenarios primarily focused on the progression of greenhouse gas concentrations, described by Representative Concentration Pathways (RCP). The IPCC has adopted a more comprehensive approach for envisioning the development of the 21st century. It advocates for the use of Shared Socioeconomic Pathways (SSP) in future models. These SSP scenarios incorporate the RCP framework into broader and more tangible narratives that explore potential human responses to the challenges posed by climate change. The Munich Re Location Risk Intelligence Tool facilitates this approach by offering climate risk data across various SSP scenarios, enabling the integration of physical risks into informed decision-making processes.

An essential element of the scenario analysis is choosing a range of scenarios that encompass a broad spectrum of potential future results, including both positive and negative outcomes.

For its physical risk assessment performed in 2024, PolyPeptide used an optimistic, a moderate and a worst-case SSP scenario¹ to facilitate challenging “what if” analyses, encompassing a broad spectrum of assumptions about future developments:

• SSP1-2.6 (Sustainability) representing an expected warming at the end of the 21st century of around 1.0–2.4°C relative to the pre-industrial period (1850–1900)
• SSP2-4.5 (Middle of the road) representing an expected warming at the end of the 21st century of around 2.1–3.5°C relative to the pre-industrial period (1850–1900)
• SSP5–8.5 (Fossil-fueled development) representing an expected warming at the end of the 21st century of around 3.3–5.7°C relative to the pre-industrial period (1850–1900).

For each of PolyPeptide’s manufacturing sites, the Munich Re tool reports were reviewed, supplemented by an analysis on a topographic map. Subsequently, flood and sea level rise risks were assessed using national or regional flood risk maps.

The physical risks were categorized as presented in Table 1 and assessed across three scenarios and future time frames (2030, 2050, 2100), based on IPCC key dates. Risks were linked to operational impacts like heat stress, higher energy use, potential blackouts, and reduced working hours, and rated as low, medium, or high.

The Group conducted a vulnerability assessment for its manufacturing sites, considering factors like turnover contribution, asset damage risk, and water-related risks such as drought. For the latter, PolyPeptide extended the analysis by considering the site’s water usage. By tallying the actual business risks associated with physical threats and their projected severity, informed by Munich Re evaluations and supplemented with risk analyses, the Group assigned a rating of likelihood and vulnerability to each location on a five-tier scale (low, medium-low, medium, medium-high, high) across seven distinct risk categories (refer to Table 1).

The scenario analysis results suggest that PolyPeptide’s manufacturing sites are generally not substantially vulnerable to climate-related physical risks. Nonetheless, a detailed examination of individual sites shows that certain risks need to be considered:

• The location in India is potentially exposed to flash floods, currently assessed as medium-low under various climate scenarios by 2030, with the risk possibly escalating to medium by 2050 and 2100 in scenarios of moderate and fossil-fuel intensive development.
• Europe is experiencing an increased frequency of extratropical storms, which can negatively impact operations, albeit typically in the short term.
• Locations in the US are exposed to tornadoes, which could disrupt operations.
• Additionally, California is susceptible to earthquakes. While not connected to climate change, these seismic events can lead to substantial property damage, power outages, and disruptions in the supply chain.
• Climate change signifies a substantial shift in temperatures, affecting all manufacturing locations. The risk of heatwaves can result in blackouts, a surge in electricity demand, and considerable effects on employee health and well-being. Additionally, temperature changes are likely to increase water demand even as global availability diminishes.

To identify priority areas in the Group’s upstream value chain that may be vulnerable to climate-related physical risks, a further scenario analysis of its primary suppliers covering over 40% of the total procurement spend was conducted. The findings indicate that supplier locations are at a higher risk of physical threats than PolyPeptide’s production facilities. The risks include an increase in the frequency and severity of floods and tropical cyclones in Asia, while suppliers in Europe, particularly from Greece, face the threat of rising average temperatures, heatwaves, and droughts. These conditions may lead to increased costs for goods sourced by the Group and, in certain instances, could result in operational halts and shipment delays. The mitigation strategies determined from this analysis involve: obtaining Supplier Business Continuity Plans, qualifying alternative suppliers, and establishing a program for the systematic evaluation of key suppliers (those in the upstream supply chain of essential materials or with a substantial portion of the Group’s expenditures) concerning the impact of climate change.

Transition risks

For the identification of the transition risks, PolyPeptide followed a qualitative multi-step approach, involving its internal specialists from different departments. The process started with a benchmark analysis. This served as basis for an expert workshop with involvement of Internal Audit, Global Engineering and Manufacturing Technology, Global Procurement, Corporate Compliance, Investor Relations, Legal, and Global EHS. The workshop comprised both an educational segment and an assessment phase. Consequently, a revised list of potential transition risks has been compiled for further analysis in an internal stakeholder survey. The survey was used to evaluate the following aspects:

• The perception of risk and its potential impact on the Group,
• Time horizon of the risks (short-, medium-, and long-term),
• The geographic occurrence and financial effects, and
• The likelihood, magnitude, and primary response to each risk.

Consequently, a final list of transition risks was compiled, examined, prioritized, and assessed regarding their potential financial impact and their integration into the ERM framework.

Physical and transition risks: financial impact assessment

Having assessed the physical and transition risks for the Group, the financial impact of each risk type was estimated.

Climate-related issues may affect the financial position of the Group, including factors such as:

• Increased direct and indirect operating costs: e.g., energy costs, procurement and transportation costs, and costs of insurance,
• Increased capital investment in low-carbon technologies, R&D, and innovation,
• Potential loss of revenues due to changing customer behavior, and
• Potential fines or penalties.

The financial impact assessment evaluated all the aforementioned factors.

Note on time horizons:

PolyPeptide defines the time horizons as follows: short-term: 0–2 yrs, medium-term:
2–5 yrs, long-term: 5–15 yrs. The result presented in the table above represents the time horizon the transitional risk is expected to surge.

Climate-related opportunities

PolyPeptide also evaluated climate-related opportunities , focusing on enhancing the efficiency of its production processes and using low-carbon energy sources.

In terms of production efficiency, PolyPeptide considers its Green Master Plan as a critical, integral element of its strategy. The Group’s innovation and technology team coordinates innovation efforts, while the manufacturing sites handle implementation. The program prioritizes reducing the quantity of solvents and reagents relative to production volumes, substituting hazardous chemicals with greener alternatives, and creating solvent recycling opportunities. The Group collaborates with customers during the initial stages of product development and upgrades its manufacturing infrastructure to support its innovative technical capabilities.

PolyPeptide refined its Green Master Plan in 2023, aiming for the efficient use of chemicals to mitigate its climate change impact. In the same year, the Group revised its global EHS policy statement, committing to an integrated and certified environmental management system at all manufacturing sites in accordance with ISO 14001. With the progress made over the last two years, all manufacturing sites will operate in 2025 with this certification.

Moreover, the EHS policy statement underscores the Group’s dedication to green chemistry from the early development stages and establishing production capacities for its application. Additionally, the Group promotes circular waste management by minimizing waste, enhancing waste stream recycling/recovery, and advancing solvent recycling methods. For example, the segregation of water from solvent waste is crucial to decrease the volume of waste requiring incineration at the manufacturing site in Malmö, Sweden. Furthermore, PolyPeptide is steadily transitioning to electricity generated from renewable sources.

Climate change resilience

PolyPeptide is committed to implementing green chemistry principles to lessen the environmental impact of its manufacturing processes. The Group is dedicated to advancing green chemistry in projects from the initial development stages and to establishing production capacities that facilitate its application. The production of peptide-based APIs necessitates substantial quantities of raw materials, such as solvents and water. PolyPeptide is committed to enhancing environmental sustainability through a robust green program aimed at reducing, recycling, replacing, or altogether avoiding the use of hazardous solvents in production.

The Group’s specialists work with external experts and collaborations, exchanging industry trends in roundtables and with expert groups to push the industry forward and make the production of medications more sustainable for patients. The Group aims to engage with customers during the initial phase of product development and consistently enhances its manufacturing infrastructure to support this collaboration. It recognizes that the ever-evolving legal and regulatory demands, coupled with increasing costs of raw materials and energy, could adversely affect PolyPeptide’s financial profile. Therefore, embracing innovative manufacturing techniques not only aligns with customer expectations but also bolsters the Group’s market position and safeguards its competitiveness.

Overall, considering the various scenarios assessed in relation to climate-related risks, PolyPeptide believes it has a resilient strategy and business model that thrives across different potential outcomes. This approach focuses on managing supply chain risks, advancing research and development, leveraging technological innovations - particularly in solvent recycling - and engaging stakeholders. A key element of this strategy is maintaining close dialogue with customers to ensure their needs, including those related to climate concerns, are effectively met.