Environmental, social and governance (ESG) issues have long been concerns of hospitals and health systems, but they may require a more formal strategy as these issues gain prominence among investors, accreditation groups and other stakeholders.
Examples of ways hospitals and health systems have focused on ESG concerns include assisting their communities in responding to and recovering from natural disasters, addressing community health needs, providing care to the indigent and ensuring the representation of a wide range of community voices in governance.
Consider the following reasons why ESG matters deserve more structured attention:
- Ratings agencies Fitch, Moody’s Investors Service and S&P Global ratings are formalizing their approach to ESG issues.
- The Joint Commission will now require primary care clinics, critical access facilities, behavioral health facilities and hospitals to accelerate health equity measures. Accredited organizations will need to designate an officer to lead strategy for reducing health disparities and add demographic breakdowns to their quality and safety data.a
- Municipal market borrowers have begun issuing ESG-labeled Green bonds or Social bonds, including the 2021 issuance of Green bonds by the University of Wisconsin Hospital and Clinics Authority for LEED-certiﬁed hospital building construction.b S&P Global ratings estimates that municipal sustainable debt issuance (i.e., ESG-labeled debt) could reach $60 billion in 2022.c
ESG factors of interest to investors and rating agencies
The growing ESG focus has drawn some pushback. In August, for example, a group of 19 state attorneys general sent a letter to the CEO of investment firm BlackRock questioning whether the pursuit of ESG policies by asset managers runs afoul of an “obligation to act in the sole financial interests of [their] clients,” including state pension funds.d Nonetheless, momentum seeks to clearly favor continued expansion of ESG-related investing and policy-making.
How hospitals and health systems will be affected by ESG
The rating agencies maintain that there have been no fundamental changes to the rating process. New ESG scores are simply a break-out of factors that were already considered in the overall rating, and the numerical scores are a response to investor demand for greater transparency on ESG issues as more investors prioritize ESG in their investment decisions. As with all other credit factors, the rating agencies’ ESG focus is on risk factors that could affect an organization’s ability to repay its debt. examples of ESG factors of interest to investors — and by extension to the rating agencies — are outlined in the exhibit on the next page.
The need to consider implementation of an ESG strategy is not limited to credit-rated organizations. the Joint commission accredits about 80% of the nation’s hospitals, for example, so its new health equity standards — focused primarily on the social component of ESG — will have a wide impact on hospitals and health systems. More broadly, a commitment to ESG principles may assist workforce recruitment efforts, especially for younger employees, and demonstrate commitment to the health of its community.
3 key components of an ESG Strategy
In creating an ESG strategy, leadership should:
- Determine which factors should be given the most attention. ESG is an evolving field, and organizations should focus on definitions that will have the greatest impact on them. For example, if they plan on issuing debt or have debt outstanding, the methodology for rating agency ESG scores should be given priority. If they are accredited by the Joint commission, its standards should serve as a starting point. For all hospitals and health systems, the methodology and standards defined by these organizations will indicate where consensus is emerging on ESG in healthcare. board members should be educated early on how evolving definitions of ESG might impact the organization and be kept informed as leadership’s strategy takes shape.
- Consider designating an executive-level position that will have oversight over ESG issues. Many organizations have already created a position to oversee diversity, equity and inclusion (DEI) initiatives, which are a com-ponent of a broader ESG framework. that role might be expanded to include full ESG oversight.
- Carefully consider when and how much to disclose with respect to ESG efforts. If the organization is being scored on or required to disclose ESG-related information, its leaders should, of course, do everything required to maintain or improve the score or meet a standard. Voluntary disclosure should be gauged according to the interest or demands of various constituents — for example, investors or the local community. Once an organization commits to disclosure, it might be difficult to disengage in the future. Also, disclosure will likely require the commitment of additional resources to gather and report on the relevant information.
For most hospitals and health systems, the growing emphasis on ESG does not require them to do anything new. Instead, it asks them to be more deliberate in collecting data on, reporting and enhancing their efforts to ensure their long-term sustainability and the health of the communities they serve.
a. Hartnett, K., “The Joint Commission to add health equity standards to accreditation,” Modern Healthcare, Aug. 12, 2022.
b. UW Health offering statement, Oct. 21, 2021.
c. Bredeson, A., “U.S. municipal sustainable debt issuance could surpass $60 billion in 2022,” S&P Global Ratings, Feb. 10, 2022.
d. “Arizona Attorney General Mark Brnovich calls out potentially unlawful market manipulation by investment firm,” Press release, Aug. 4, 2022.