In our last blog, we unpacked what Environmental, Social, Governance (ESG) means, its implications for hospitals and health systems, and conclude that it has real staying power in both finance, investing, and branding.
But with all the priorities demanding board room attention, it's justified to be skeptical if ESG is among the most pressing issue to address. We do some of the work for you by assuming a skeptic's perspective to ask "is ESG really worth your time right now?"
Based on our research to date, here are five of the most common reasons for not moving on ESG and what our research indicates are the answers:
While there's not an auditor coming by your organization tomorrow to evaluate your carbon footprint or measure your board's minority representation, regulators are building performance evaluation frameworks that will have healthcare applications.
In March 2022, the U.S. Securities and Exchange Commission (SEC) proposed rule changes that will mandate all companies to include climate-related disclosures in their reports. And in 2023, the Joint Commission is expected to set new accreditation standards to address climate impacts of hospitals and disincentivize waste production or unnecessary consumption.
There have also been signs that health equity and social determinants of health performance will increasingly factor in CMS reporting and incentive programs for health systems.
New facility design and capital planning is the number one board strategic issue when it's time to build but is ignored when it's not. There's a risk of thinking about ESG in the same pattern. That would be a mistake.
There are areas of the U.S. where the average age of healthcare facilities is as high as 27 years old. And the estimated cost of repairing ageing facilities in the U.K. has risen to over £10B. But let's set that aside—there are a whole host of investments into energy, heating, and waste management in healthcare that we need to make progress on. And the good news is that it often doesn't require building an entire new facility. You can retrofit more carbon-efficient systems onto your existing infrastructure and still see significant cost-savings. Cleveland Clinic, for example, saves $3M every year by switching all lightbulbs to locally manufactured LED bulbs
The truth is, the ESG market is still developing and there are no hard-and-fast track records for savings on borrowing rates that ESG can provide. Outside of healthcare, organizations have negotiated, for example, discounts of five basis-points off of a 200 basis-point interest rate by meeting ESG criteria.
Whether or not this is enough of a discount to warrant tearing up your strategic plan in favor of an ESG-centered plan is dependent on unique factors within your organization such as the size of your organization and your revenue.
And therein lies a point of contention. ESG criteria are standardized, and progress is measured against peer organizations. To write your own narrative and achieve the targets and outputs that matter most to your organization and your people, you may have to make a tradeoff and forgo the capital and clout that ESG brings you in favor of personalized KPIs.
Incoming performance requirements will force your hand—either you adopt an ESG-centered strategy now when you can get your organization ahead of mandates, or you'll have to overhaul your organization's strategy rapidly to keep up with peers and ESG-associated regulations.
The good news is you might be doing a lot of the right things already. Hospitals are already widely investing in things the finance sector would deem "social" as part of their operational mandate. There is no downside to labeling these investments social. It signals to ESG lenders that you're ready to do this kind of work and therefore potentially eligible for better financial arrangements.
How about total cost of care management? Health systems of all configurations across the globe say they want to move from a "reactive sickness system" to a "proactive health system." And they're willing to make the connections between the clinical and non-clinical factors that maintain health. Health equity and environmental stewardship are critical non-clinical factors here.
To put it another way, the distinction between ESG and our Hippocratic Oath is a false one. At its worst, healthcare contributes to climate change and health inequity. Climate change worsens health outcomes—fossil fuel air pollution is now responsible for 1 in 5 deaths worldwide. So do health inequities—in the US, indigenous people are more than twice as likely to die from COVID-19 than white or Asian citizens.
As more and more people use our health services, these outputs will worsen unless healthcare organizations make long-standing investments to reduce their contribution to these issues. ESG can provide a framework and accountability mechanism to achieve that.
The final thought we'd leave any board that is skeptical of investing time and effort in ESG is that it is not an all or nothing proposition. Healthcare providers are uniquely positioned on the social impact side to get credit for the work they're already doing. And the lack of stringent performance criteria means that you can design a plan and narrative that fits your organization, regardless of if it meets ESG standards or not.
The important thing is that you do it with outcomes for your patients and staff as a priority. Not a lot in health care has felt like it was in our control in the last three years. But we worked on problems that changed society. This is an opportunity to make our communities stronger but in terms that we can influence.
ESG is increasingly being prioritized in investor and regulator decision-making. In part one of this two-part series, Advisory Board's Miles Cottier looks at what ESG really means and assesses if it's here to stay.
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