ESG: What It Is and What It Means for Healthcare

Chances are, you may have heard of a little acronym called ESG. What you may not know, however, is what it means exactly and why it’s important for healthcare. After all, the last thing we need is another acronym.

While it’s easy to explain what each letter stands for — environmental, social and governance — its implications are more complex. ESG is often used interchangeably with more familiar terms like sustainability and corporate social responsibility. All these terms are related, but they are not the same, as ESG also poses financial ramifications in some cases as a data point for lenders to evaluate risk. Sustainability speaks to environmental performance, specifically creating a positive net impact on our finite resources and natural ecosystems. Corporate social responsibility addresses how organizations operationalize environmental, social and governance issues. Some organizations and industries treat these terms slightly different, which means individual context is important in any conversation.

So what does this mean for healthcare? Behind the buzz is the fundamental principle of improving human health. ESG provides a framework for organizations to integrate these concepts into their core strategy rather than peripheral projects. In order to achieve this goal, we must understand what these three words mean and how they connect to our overarching mission as healthcare leaders.

Creating a common understanding

First, let’s define these terms on their own.

Environmental

The hallmark issue for the environment over the next decade is climate change. Conversations on the “E” of ESG often focus on greenhouse gas emissions and carbon footprints, or what’s called Scope 1, 2 and 3 emissions. Curbing emissions is a critical component of combating climate change, but there is more to the equation. This includes sourcing sustainable materials, reducing chemicals of concern, advancing zero waste and circular production, improving production and disposal of hazardous waste, understanding ecosystem services and preservation, and bolstering the resiliency of facilities and operations to extreme weather.

Social

Social issues are the downstream impact of safety, well-being, diversity, inclusion, belonging and other considerations to employees and communities. Organizations must consider the culture they are creating and how systemic bias, norms and behaviors, equitable representation, pay and benefits, and engagement impact their workforce. These considerations also apply across the supply chain and operations, including supplier diversity, product safety, data security and privacy, and community impact.

Governance

Governance covers issues that deal with healthy organizational structure. This includes policies and incentives like board diversity, engagement and oversight of ESG issues, executive compensation, ethics, conflicts of interest, codes of conduct, tax reporting and policy engagement.

Financial ramifications

Another important differentiator for ESG is how ratings agencies use the information to assess risk.

Increasingly, climate-related disclosures have become required to access capital. In March 2022, the Securities and Exchange Commission (SEC) proposed rule changes that would require registrants to include climate-related disclosures in company statements and periodic reports, including disclosures around emissions. In some cases, this makes climate targets and emissions reports as financially and legally significant as audited quarterly earnings, making ESG targets and data management increasingly critical.

In a narrow sense, you could define ESG as an approach to financial due diligence and risk management. Firms like Moody’s, S&P Global and Morningstar’s Sustainalytics analyze mountains of diverse data and grade companies on their exposure to and management of industry-specific ESG risks — all in an effort to answer the question of how a company’s environmental, social and governance policies and practices financially affect their shareholders. Institutional investors and asset managers use these ratings as part of their capital allocation and decision-making processes. The ratings are also key to deciding who is — and isn’t — on ESG-themed mutual funds.

This approach has not come without scrutiny, as the SEC and other companies have criticized the lack of transparency into their decision-making criteria, which can lead to high variability between ratings and give the appearance of “box checking” that doesn’t always measure what really matters.

Connecting ESG to the mission of healthcare

Healthcare leaders share a common mission — to enhance the health and well-being of individuals and communities. The practice of ESG aligns squarely with that shared mission and has the potential to accelerate innovation, elevate our value and drive our businesses forward. A wide variety of stakeholders, from employees to suppliers to agencies and financiers, can look to ESG’s framework to inform their decision making. 

The healthcare sector itself contributes 8.5% of all U.S. greenhouse gas emissions, and the majority stems from its supply chain. The disease burden from U.S. healthcare pollution is similar to that of medical errors — but has yet to receive the same level of attention.

With that said, healthcare is also uniquely equipped to address the interconnected nature of ESG issues. For example, understanding environmental issues is essential to addressing health equity in our communities. Climate change, extreme weather, air pollution, water scarcity and declining soil quality pose short- and long-term risks to community health and economic prosperity.

According to the World Bank, air pollution costs the global economy $225 billion annually and is the fourth leading cause of premature death. But these threats are not evenly distributed across communities, as social determinants of health make specific segments of the population more vulnerable. Vizient’s patent-pending Vulnerability Index  highlights this connection between specific social determinants like environment and health outcomes. To achieve our shared mission, we must work together to restore our ecosystems and make health equity the new baseline.

Government agencies are also stepping up to make these issues a priority. The U.S. Department of Health and Human Services is encouraging the industry to address climate change with its HHS Climate Pledge, including a commitment for signatories to reduce organizational emissions by 50% by 2030 and achieve net-zero by 2050. Vizient is a signatory.

Healthcare is also collaborating with other industries to create actionable frameworks to combat climate change. For example, the SEC is using the Task Force on Climate-Related Financial Disclosures (TCFD) as its model. Vizient and its subsidiary Sg2 led the development of healthcare’s first TCFD Issues Brief. The report culminated with the development of a climate risk-opportunity profile, which has been shared with industry peers like the National Academy of Medicines to support further dialogue, exploration and action.

ESG requires collaboration 

The goals of ESG’s framework can seem vast and daunting, but that’s by design. While organizations must take individual ownership for their own strategies, collaboration is essential to move the needle within healthcare. From establishing community partnerships to prioritizing a sustainable supply chain, ESG must become a shared priority. Transforming the way we do business, and shifting our thinking from efficiency to resiliency, takes intentional effort and requires ingraining these principles into the mission, strategy and culture of our organizations. Our future depends on it.