ESG in the Boardroom and on the Balance Sheet
Top down: The vital role of the board in executing ESG
As ESG transforms from a buzz term to an important framework for healthcare organizations to implement, it’s crucial for boardrooms to recognize their critical role in forming and guiding an organization’s ESG strategy.
The past year has brought heightened attention to ESG for the healthcare industry. In evaluating the financial health of organizations, regulators ranging from ratings agencies to the U.S. Securities and Exchange Commission are taking into consideration ESG metrics such as sustainability. At the same time, employees and consumers increasingly expect corporations to act in a socially responsible manner.
These pressures have led boardrooms across the country – including in healthcare – to take notice. And experts claim it should be more than just on boards’ radars, but a top priority for them going forward. ESG touches essentially every aspect of a health system, from ensuring patient safety and quality standards to hiring practices and building design. Its all-encompassing nature requires commitment that starts at the very top of the organization. Board members must prioritize creating and supporting an ESG strategy – backed by measurable goals and meaningful investment – to ensure it will become integrated in day-to-day operations and management.
In fact, when thinking about the ESG acronym, which stands for environmental, social and governance, organizations should think of “the G as effective board governance of the organization, including governance over the E and the S,” said Lisa Goldstein, senior vice president of Kaufman Hall, a management consulting firm.
As boardrooms embark on developing an ESG strategy with the C-suite, it’s vital for board members to become educated on ESG and what it entails.
There has been a boon recently of boards seeking out education sessions about ESG, said Jamie Gamble, managing director of PwC, who works with clients to build corporate governance around ESG.
Beyond educating themselves on ESG framework, boards are seeking to understand how it fits into their organizations’ overall value proposition, Gamble said. Tracking and reporting ESG targets can easily become a mere exercise – relegated to few within the organization once a year and sent out to relevant stakeholders through a report – but boards are interested in understanding how the ESG framework can be woven into their organizations’ strategy for the long-term.
“We’ve already evolved past the point at which ESG can be a compliance exercise or a public relations or government relations exercise. It needs to be more fully integrated,” Gamble said.
Indianapolis-based pharmaceutical company Eli Lilly has connected its ESG strategy to the organization’s mission, which has helped keep this work top of mind.
“The more you can integrate your ESG goals into your purpose as a company, they become self-sustaining,” said Jim Greffet, head of ESG strategy at Eli Lilly.
Eli Lilly has identified 13 ESG priorities based on feedback from stakeholders including advocacy organizations, employees, shareholders and even prospective employees. Covering the areas of patient safety, product stewardship, access and affordability, and more, the priorities align with Eli Lilly’s mission of creating trusted medicines that help people.
“The 13 topics were identified deliberately,” Greffet said. “Our intent was not to check every box we could find. If it becomes a box-checking exercise, that also can lead you astray.”
By identifying priorities, Eli Lilly has established a framework to allocate resources and track progress in specific areas. The board is provided information on the progress of the overall ESG strategy, but they are also presented a deep dive of certain priorities to offer them a detailed report of specific ESG initiatives.
As a best practice, an organization’s ESG strategy should be supported by measurable goals that can be easily tracked and then shared with the board, regulators and other relevant stakeholders. This ensures the strategy remains a priority.
Eli Lilly is publicly releasing its progress on ESG goals, even creating a website. “We think about making a disclosure a little bit like we’re getting married. This is a long-term commitment. Even if a certain metric looks favorable today, we’re prepared to keep talking about that metric even if it doesn’t look favorable sometime in the future,” Greffet said.
While disclosure of ESG metrics is important, the challenge right now is the absence of standards and benchmarks for measuring ESG, said Kaufman Hall’s Goldstein. For example, organizations are likely measuring diversity, equity and inclusion in different ways. “The industry is still getting its sea legs when it comes to this,” Goldstein said.
This can become particularly concerning if regulators such as the SEC implement standards for ESG reporting that differ from what an organization is currently reporting. For instance, there could be wide variations in how to measure carbon emissions.
Given this, Goldstein advises organizations to still measure their ESG goals, but to make a clear caveat that the reporting methodologies might change.
Greffet said Eli Lilly has approached the potential for regulatory reporting requirements as separate from its voluntary public reporting.
ESG will require investment and resources, both in the long-term and short-term. This can be a tough pill to swallow as healthcare systems and hospitals face shrinking margins, rising costs and labor challenges.
Boston Medical Center, a safety-net provider, is working toward achieving carbon neutrality by 2030. The organization’s sustainability goals present an opportunity to lower costs by reducing its physical footprint but do require investments. Additionally, Boston Medical Center invests in addressing social determinants of health for vulnerable communities.
The board is open to such investments because there is trust between directors and the C-suite, said Kate Walsh, CEO of Boston Medical Center.
“The better our business, the more latitude we get from the board to take some risks in the area of social determinants of health and other investments,” Walsh said.
When considering investments, it’s the board’s responsibility to evaluate them through the lens of the organization’s future viability, PwC’s Gamble said. This comes into play particularly with ESG investments such as talent recruitment, institutional reputation and climate goals, which may take years before the full savings are realized.
An investment a board may consider is hiring an executive dedicated solely to ESG activities. Eli Lilly made this decision in 2020; Greffet heads the company’s ESG strategy, with one other person on his team.
The creation of Greffet’s role came from a recognition that the ESG strategy touches on almost every function of the company, and there is a need for someone to integrate all the various activities and synthesize them into a cohesive strategy, he explained.
His title also indicates to employees and external stakeholders that ESG is a top priority for Eli Lilly. “Companies don’t create jobs for things that aren’t important,” Greffet said.
“In my opinion, it’s a relatively small investment that has a very broad impact across the company and your stakeholders.”
While hospitals might not have the resources to dedicate an employee solely to ESG efforts, that doesn’t mean they can’t implement an impactful ESG strategy, according to Goldstein.
“Chances are probably good that you’ve got folks within the organization that are already doing this,” she said.
As ESG becomes more ubiquitous in healthcare, the composition of who sits on its boards may evolve.
Improving diversity is a common ESG goal, and diversity on the board is an essential part of that. “The rising importance of ESG issues will continue to cause companies to push hard to diversify their boards from the traditional white male dominance. That’s a process underway but still has quite a distance to go,” Gamble said.
In terms of seeking out board members with specific ESG expertise, that’s not necessary – and potentially even detrimental. Just because someone has ESG or climate expertise doesn’t mean they’d be a good board member, Gamble said.
“The focus is not, ‘Can we get somebody on the board who has these skills?’ but (rather), ‘Are we making sure the board has really good access to people with the right skills?’” he said.
With a diverse board committed to weaving ESG throughout health system structures and processes, making the necessary investments, and prioritizing reporting, real progress is fully within reach. Healthcare organizations can make a great impact on the health and lives of the communities they serve by transforming from the inside out, and importantly, from the top down.
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