In the past, most of the pressure to disclose ESG (environmental, social, and governance) data was on financial institutions. Today, as their stakeholders expect organizations to not only disclose, but act on, issues related to ESG, greenhouse gas (GHG) emissions, and climate risk, the focus has shifted to non-financial industries that include healthcare.
The reality is that, with the prospect of mandated ESG reporting in the near future, the urgency for healthcare providers to adopt ESG is accelerating and mounting on multiple fronts:
- In the U.S., regulatory changes are on the horizon. Proposed climate disclosure requirements from the SEC would require publicly listed providers to report on their GHG emissions and climate risk governance, strategy, risk management, and impacts. As publicly traded companies expand their ESG efforts within their own organizations and across broader value chains, even those healthcare organizations that are not required to submit ESG reporting may feel the pressure to do so.
- In Europe, the Corporate Sustainability Reporting Directive (CSRD) has already been adopted and will require companies meeting certain criteria to disclose on a range of ESG topics focused on governance, sustainability impacts, risks, and targets. It is expected to impact thousands of entities that are not currently required to report on ESG, and it may create reporting obligations for U.S. parent entities with operations in the EU.
- The HHS Health Sector Climate Pledge launched by the Department of Health and Human Services (HHS) encourages hospitals and other industry stakeholders to agree to cut their GHG emissions by 50% by 2030.
- Stakeholders—including the Joint Commission, insurers and financial rating agencies—are beginning to expect healthcare organizations to provide information about their ESG efforts.
- ESG due diligence is becoming important for major donors considering gifts.
- ESG performance scoring is expected to be a factor in future Medicare payments.
While historically, the healthcare industry has been slow to embrace ESG, most hospitals are already committed to diversity, social determinants of health, and other missions that are often included under the umbrella term “ESG.” The present goal is to build on these efforts in enabling healthcare organizations to develop robust programs and greater transparency about those programs and their results.
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Measuring environmental effects
The ‘E’ of ESG: A logical starting point
Because of their continuous operation and use of high-power lighting, air exchange, and filtration systems, hospitals are considered to be among the most energy-intensive buildings, producing significant amounts of GHG emissions and waste. With responsibility for 8.5% of total U.S. GHG emissions, healthcare’s outsize impact on the environment makes the “E” of ESG a priority for the industry.
With new international ESG disclosure regulations and pending new regulations in the United States, healthcare organizations will need to be able to report their activities in environmental stewardship, social responsibility, and corporate governance. If and when the SEC enforces climate disclosure requirements for publicly listed companies, many healthcare organizations will be required to disclose ESG metrics that may include:
- Annual GHG emissions
- The potential impact of climate risks on financial performance
- Strategy, governance, and risk management practices that have been put in place for climate-related risks
The maturity levels of ESG, and environmental programs in particular, at healthcare organizations run the gamut. Some, such as the Cleveland Clinic and other large health systems, are at the leading edge of reporting data about their progress in meeting established environmental goals. At the other end of the spectrum are organizations that are so new to the ESG reporting process tracking and reporting their impacts would be a heavy lift.
The materiality assessment baseline
“Those just starting on ESG may or may not have the resources they need to put towards it and want to understand what the most important topics and frameworks are for them to focus their limited resources,” said John Friedman, Grant Thornton managing director, ESG and Sustainability. “They may not have the resources to do more than they need, so it makes sense to focus on the things that matter most for the success of those stakeholders.”
"Those just starting on ESG may or may not have the resources they need to put towards it and want to understand what the most important topics and frameworks are for them to focus their limited resources,”
“For those organizations, we recommend they do a materiality assessment,” said Kristi Knudson, Grant Thornton manager, ESG and Sustainability. “That exercise includes assessing the material topics and identifying ESG priorities to ensure that your organization is pursuing ESG initiatives that are in line with business and stakeholder goals. It’s a good exercise that can help you begin to understand the priorities of your organization and your industry.”
Materiality assessments serve as roadmaps to help organizations identify the ESG issues that are most important to their stakeholders. They inform both reporting and strategy, helping the organization set reasonable goals.
One material topic of increasing importance to stakeholders is GHG emissions. Developing a GHG inventory is the first step to establish a baseline view of the organization’s carbon footprint and to help identify and manage risks and set decarbonization goals. “GHG reporting is where the regulatory pressure is coming from now,” Friedman said. “Healthcare organizations will have no choice—it becomes a ‘how’ rather than an ‘if’ or ‘when’ question.”
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Pathways to readiness
Assessing climate risks and opportunities
It is also important for healthcare organizations to understand the impact of climate on their operations—what the risks are that are most material to the organization and where they are—and to identify opportunities for energy efficiencies and green capital. The framework for climate reporting to disclose climate-related risks and opportunities developed by the Task Force on Climate-related Financial Disclosures (TCFD) is quickly becoming the standardized format for climate reporting.
“Hospitals and health systems will need to conduct a climate risk assessment and consider disclosing it in line with TCFD as investors and regulators continue to demand more insights into how climate risks will impact their business, the financial implications of those climate change risks, and how they are being managed,” Friedman said. “TCFD has basically four dimensions, but they really want to know two things: What are your climate-related impacts and how are you assessing and managing those risks? There are no targets and no reductions required. It’s simply a snapshot.”
Assurance readiness for more advanced healthcare organizations
Healthcare organizations that are more advanced in their GHG and ESG reporting will be focused on reporting, compliance, and assurance. “They will need to make sure that they are in a good place for the reporting that will be required by emerging regulations in both the U.S. and internationally,” Friedman said.
CSRD adopted rules and the proposed SEC climate disclosure rule were designed to ensure that reporting organizations provide consistent, comparable, and reliable information about climate risks. They include complex requirements for assurance of the disclosure of GHG emissions data. As a result, healthcare organizations are increasingly choosing to have their ESG disclosures undergo an assurance readiness engagement to identify gaps and develop prioritized recommendations they can address before pursuing assurance. “It will be important for them to focus on their GHG emissions data, collection, and disclosure and ensure they are using valid data and have necessary and appropriate controls in place,” Freidman added.
“A lot of healthcare organizations are realizing that they need to refine their processes to have more quality checks and controls in place to ensure the information they’re disclosing is accurate and reliable,” said Knudson. “They will need to make sure that the ESG data being publicly shared, is complete and transparent. At Grant Thornton, we are helping clients assess their existing processes with our assurance and reporting readiness solutions. This provides them with a focused list of priorities for preparing for future reporting and assurance requirements.”
Determining costs and benefits
Making the business case for ESG
In addition to the direct health benefits of clean air and water for patients, staff, and surrounding communities, healthcare organizations are realizing the financial and operational benefits of moving forward with the “E” of their ESG initiatives. “If you install energy-efficient equipment and design a building that is energy efficient, over time, you should see lower operational costs,” said Knudson. “Patients can often choose where they want to go for treatment these days, so it’s important that you ensure that your hospital is a healthy place and that your facilities reflect your organization’s focus on patient well-being.”
To offset the cost of emissions reduction and climate resilience projects, new funding resources and incentives are available. The Inflation Reduction Act (IRA) has unlocked significant new financial incentives for hospitals to build new energy-efficient buildings, develop solar projects, retrofit or upgrade to be more efficient, purchase commercial clean vehicles, and more. “With investments in charging stations for employee EVs, for example, there are huge tax incentives,” says Friedman. “It’s important to take advantage of the tax incentives that are available because they can help a great deal with some of the cost.”
“Patients can often choose where they want to go for treatment these days, so it’s important that you ensure that your hospital is a healthy place and that your facilities reflect your organization’s focus on patient well-being.”
To prepare to meet the growing list of ESG disclosure requirements, the U.S. healthcare sector must commit to regular measurement and disclosure of relevant ESG data and ensure that it is assured by credible accounting firms.
The challenge ahead for healthcare organizations in meeting new requirements for climate risk and sustainability disclosures will make it necessary for them to produce the required data in an auditable format.
“I think it’s important to note that a lot of this data exists within organizations, but it may not be centralized, and it may be in disparate systems,” said Friedman. “It all needs to be aggregated, collected, and calculated appropriately. It’s all about putting accounting level standards to this data that may not have been done before. And, if you have multiple locations, it gets even more complicated. We can help healthcare organizations sort through that.”
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