ESG: Healthcare's new imperative

Environmental, Social and Governance, otherwise known as ESG, is a framework commonly used by corporations and public companies to showcase to shareholders, donors and customers their commitment to social responsibility. By prioritizing—and publicizing —ethical mission and values, companies can generate more investors and consumer loyalty.

In healthcare, hospitals and health systems overall have been slow to embrace ESG. But the imperative for healthcare leaders and boards to understand and adopt the ESG framework and principles has become immediate. Since the COVID-19 pandemic, pressure by consumers, communities, employees and the federal government has been mounting for healthcare organizations—and companies in other industries —to adopt and invest in socially responsible principles and values.

For example, the U.S. Securities and Exchange Commission is considering requiring public companies to report on their ESG commitments, with a particular focus on environmental impact.

Not-for-profit hospitals are also consistently questioned by government entities about the validity of their tax-exempt status, and embedding ESG principles may help them better respond to these concerns.

“The power of the ESG framework, or at least the promise of it, is that it doesn’t just say these things matter; it says they matter for organizational and financial performance,” said Witold Henisz, Deloitte & Touche Professor of Management at the University of Pennsylvania, an expert on ESG at corporations.

The need for ESG

Because hospitals and health systems are inherently mission-driven, most are already engaged in some elements of ESG, but they are not necessarily calling it that. For instance, it’s commonplace for providers to have goals regarding diversity, equity and inclusion of their workforce and the social determinants of health, which relate to the social pillar of ESG.

Although individual hospitals or health systems are probably already following some ESG principles, building an ESG framework holds leadership accountable by setting clear goals and expectations.

“The question for health systems is, are we going to be a follower or are we going to be a leader (on ESG)? We want to be a leader, so let’s get on top of it, and let’s begin to have these discussions.”
Randy Oostra, ProMedica

“The ESG framework is not just a label,” Henisz said. “It gives you goals that you should allocate resources to and then measure and monitor that.”

Take, for instance, Toledo, Ohio-based ProMedica. Over the last 14 years, the health system has been at the forefront of addressing social determinants of health for its community—but it was roughly nine months ago that the leadership team decided to create an ESG framework. The COVID-19 pandemic, which starkly emphasized racial disparities, was a driver of the decision. The action also was about re-affirming ProMedica’s role as an anchor institution for the community and the obligation that comes with that role.

“The idea here is for healthcare to be much more on the forefront of these things,” said Randy Oostra, CEO of ProMedica. “Our fundamental mission is to take care of communities, and that extends beyond our walls. …The question for health systems is, are we going to be a follower or are we going to be a leader? We want to be a leader, so let’s get on top of it, and let’s begin to have these discussions.”

The ESG framework will formalize the work ProMedica is already doing around social determinants of health and DEI, giving these initiatives and outcomes higher importance. The framework will also clearly lay out strategies related to the environment and governance, which are currently less formal goals for the system.

ProMedica established about six months ago a multi-disciplinary working group that is creating the health system’s ESG goals and the metrics it will use to track them. Once finalized, Oostra said, these will be presented internally to staff and the board before being announced publicly.

Transparency of the ESG framework is vital, according to experts. All stakeholders—be they patients, lawmakers, donors, regulators, or in the case of public companies, investors —are seeking this information from large industries when determining whether or not to engage.

“Without the ability to find this information quickly, stakeholders may conclude that healthcare organizations do not have an ESG program or haven’t considered the impact of ESG issues, such as climate change, on their organization,” said Laura Robinette, Partner & Trust Solutions Health Industries Leader at PwC. “This could potentially result in poor ESG ratings and a competitive disadvantage among peers that may be communicating ESG impact in a more effective manner.”

Public disclosure of ESG goals and measures will also ensure it remains a priority among leadership, who are inevitably balancing competing priorities.

“There’s a real benefit to disclosure. It can be uncomfortable, especially if you’re a weak performer,” Henisz said. “But it can mobilize action. It mobilizes pressure.”

While healthcare organizations are already doing some work related to ESG, there’s much to improve on. While many hospitals now have some goals surrounding the social pillar of ESG, they are just scratching the surface on the environmental and governance pillars.

“The ‘S’ pillar has been embraced and resonates with healthcare organizations,” Robinette said. “However, we are starting to see healthcare organizations focus on and make progress in the ‘E’ and ‘G’ pillars, especially with many healthcare organizations focusing on sustainability initiatives and the ‘green’ focus on capital expenditures.”

ESG accountability

There is no one-size-fits-all approach to instilling ESG at a hospital or health system, but it can only happen with buy-in from the board of directors and C-suite. The approach to ESG requires commitment through investments and monitoring of progress to reach goals, both of which need support from the top.

“This is a ground-up strategy,” said James Flynn, Managing Partner at law firm Bricker & Eckler who advises healthcare organizations on board governance and executive compensation.

This is on display at for-profit Tenet Healthcare, which in one example of forward progress, announced in March that it formed a board committee solely dedicated to ESG matters.

“No organization can ever declare ‘finished’ on ESG.”
James Flynn, Bricker & Eckler

Those responsible for carrying out ESG priorities should also have access to the C-suite and board. At Bon Secours Mercy Health based in Cincinnati, Ohio, a cross-functional ESG steering committee is actively engaged with senior leaders and the board of directors. The steering committee also ensures each element of ESG is prioritized and accounted for annually, said Deborah Bloomfield, Chief Financial Officer of Bon Secours Mercy Health.

In addition to ESG goals being transparent to staff and communities, they should also be tied to compensation to encourage focus and attention. This is already happening among the CEOs whose compensation is partly dependent upon reaching DEI metrics.

Going a step further, Oostra said ProMedica has tied some ESG goals to its incentive program next year for employees.

Additionally, ESG must be a living-breathing commitment, constantly adapting and evolving along with the organization as it progresses on goals. “No organization can ever declare ‘finished’ on ESG,” Flynn said.

Indeed, Bon Secours Mercy Health said it will iterate its ESG program over time.

“Our ESG program continues to evolve to ensure that we are being the most effective and efficient that we can be, identifying the right priorities and taking measured and thoughtful action to achieve our goals,” Bloomfield said. “As our world continues to evolve, our ESG focus widens to include key issues including ethical compliance and cybersecurity, and we continue to work to create a safe, fair, diverse, inclusive and engaging workplace for all associates.”

“If you have the capacity to provide health services to patients, you have the capacity to assess and look at ESG impacts.”
Witold Henisz, University of Pennsylvania

Finally, organization wide ESG goals must be realistic. For independent or small provider organizations, experts recommend starting with just a few areas. Beginning small will also ensure staff and leadership don’t get bogged down, disappointed and overwhelmed.

“Get some quick wins where you can actually show improvement and then build on that,” Henisz said, adding that organizations of any size have an obligation to consider building an ESG framework.

“If you have the capacity to provide health services to patients, you have the capacity to assess and look at ESG impacts,” Henisz added.

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