What is ESG and Why Should Healthcare and Supply Chain Leaders Care?

The terms “ESG” and “sustainability” are showing up more frequently in the healthcare trade press and on conference agendas. This is a natural evolution of the growing recognition that socioeconomic and environmental factors often have more to do with someone’s health status than the clinical care received. These are important issues for supply chain professionals, as they are increasingly being asked to help direct the power of procurement to address both health equity and the environmental impact of healthcare operations. This month’s column will offer a foundational understanding of what these various terms mean, given that they, like so many others used in healthcare, are often defined differently by various stakeholders. In future issues of Value.Delivered, we will dig deeper into why and how healthcare system executives are prioritizing ESG and how supply chain professionals are advancing ESG objectives for both their own institutions and the communities they serve. Let me know if you have specific questions or if you want to share examples of ESG-related initiatives, especially involving the supply chain.

First, what is ESG?

The term ESG, which stands for environment, social and governance, was first used in the 2005 landmark report, “Who Cares Wins,” which documented the financial value of managing risks related to all three factors. ESG ratings are used by investment firms, bond-rating agencies, and others to help evaluate how well an organization manages risks by protecting the environment and supporting stakeholders, including investors, customers, employees, and the community in which it operates. In contrast to older terms like corporate social responsibility that often associated “doing the right thing” with higher costs, ESG ratings stress how addressing social and environmental issues improves an organization’s long-term viability and resiliency.

ESG and sustainability are sometimes used interchangeably, although some view sustainability narrowly as primarily an environmental issue. ESG takes a broader view, including the sustainability of the organization itself, its ability to function, and that of the ecosystem in which it operates. 

Let’s explore each of the aspects of ESG: 

Environment 

For years, healthcare supply chain leaders focused their environmental sustainability efforts at reducing the use of products containing chemicals of concern, such as plasticizers used in intravenous (IV) tubing and bags and flame-retardants in furniture. Recently, climate change has garnered more attention, given its particular relevance for healthcare delivery. Forty-six million healthcare workers told government leaders attending the 2021 COP 26 climate conference that they are “already responding to the health harms caused by climate change,” such as respiratory ailments caused by smoke from wildfires and longer pollen seasons.

At the same time, healthcare is part of the problem. A U.S. House Ways and Means Committee study recently found that healthcare operations contribute 8.5 percent of the nation’s carbon footprint, with hospital operations the largest contributor to greenhouse gas (GHG) emissions. As part of that study, 85 percent of healthcare systems reported having suffered at least one climate change-related extreme weather event, resulting in millions of dollars in repairs for many. For this reason, the Centers for Medicare and Medicaid Services (CMS) has called on health systems to measure their own GHG emissions, and to provide feedback on how to maintain operations during such events, something health systems signing the White House Climate pledge have already committed to do voluntarily.

Social

The environmental impacts of healthcare operations also have relevance for the S or social aspects of ESG. First, relationships with suppliers are important, given that the products and services they provide account for a significant portion of a hospital or healthcare system’s total carbon footprint.

Second, climate change-related events, from hurricanes in the southeast to wildfires in the west, often take the biggest toll on those living in disadvantaged communities because they have less means to mitigate the impacts. For example, residents may not have transportation to evacuate in the event of a hurricane, or air conditioning to escape extreme heat events. Historically, supply chain leaders have been called upon to improve health equity by increasing spend with certified diverse suppliers. More recently, the focus has shifted to using the purchasing and hiring power of hospitals and health systems to support economic development and job creation in economically challenged communities.

A healthcare provider’s commitment to environmental and social issues is also important for workforce recruitment and retention, a key challenge for many health systems in the wake of the pandemic. According to the global professional services firm Marsh McLennan, there is a positive correlation between an organization’s performance on ESG-related matters and employee recruitment and satisfaction. This will only increase as millennials and Gen Z workers become nearly three-quarters of the labor market by 2029.

Governance

The G, or governance, aspect of ESG is broad in nature, covering a range of factors, from board and executive diversity to corporate transparency. For healthcare institutions, the latter can include how well an organization protects patient data, its compliance with price transparency regulations, and whether it minimizes unnecessary or duplicative care.

The Bottom Line

Perhaps the most compelling argument for healthcare executives is the increasing focus on ESG by bond issuers and credit-rating agencies. The Securities and Exchange Commission (SEC) already includes ESG factors in its oversight of publicly traded companies, and it has floated the idea of requiring such organizations to report on their direct and indirect (e.g., electricity use) GHG emissions, as well as those generated by the supply chains for the products and services procured. These are referred to as Scope 1, 2, and 3 emissions, respectively.

This kind of scrutiny is beginning to encompass not-for-profit hospitals. Fitch Ratings recently introduced a set of ESG relevancy scores that it says investors can use to interpret how an organization’s ESG practices impact financial performance. In the end, the Fitch Ratings lead for the not-for-profit healthcare sector, Kevin Holloran, says failure to address ESG-related risks could impact both access to, and the cost of, capital.