Should Health Care and Life Sciences Consider ESG? Explore Pros and Cons

The Inflation Reduction Act (IRA) included dozens of tax credits for green energy initiatives. It is an example of policies meant to incentivize businesses and organizations — including in health care and life sciences — to advance sustainable energy practices. While it is a great opportunity to consider on its own, taking advantage of these IRA incentives also lends itself to the emerging ESG movement.

What is ESG?

ESG stands for the environmental, social and governance efforts of an organization. It centers on an organization’s corporate citizenry responsibility, both internally and externally. This could include how an organization reduces its carbon footprint, selects vendors, supports diversity efforts, or determines which investments to make. ESG is also taking on a larger role in financial assessments when investors and lenders are considering deals.

The concept and words (ESG) seem to have originated more formally in a United Nations 2004 report, Who Cares Wins — though companies have long been involved with corporate citizen activities. Past efforts were likely done ad hoc, whereas ESG efforts are attempting to pull these actions into a more formal framework.

Recent regulatory examples on ESG

While some companies are pursuing various ESG efforts voluntarily, we are beginning to see regulators step into the space. Last year, the SEC proposed ESG requirements for companies it regulates. The SEC has yet to release the final rule, but this is an example of potential increased regulatory involvement.

In health care regulations and policy, we could view the Biden administration’s efforts on health equity as ESG-esque. For example, new value-based payment models (e.g., REACH ACOs) include various health equity strategies. While participating in these models is voluntary, those that do so must develop health equity plans. Further, Medicare’s payment systems are beginning to integrate social determinants of health into quality and payment programs, which is also a component of ESG. The green energy tax credits are also an example of public policy being used to advance sustainable energy. (See our earlier blog post for details on the IRA credits.)

Why health care and life sciences might consider ESG

There are many reasons organizations may consider ESG activities, including:

• Risk management — Understanding ESG’s progression andwhere various issues (think governance/transparency, decarbonization, etc.) may be headed is a part of risk management. For those involved in dealmaking or who have global business, ESG may even be required.
• Generational expectations — Generations in or moving into the workforce may demand a higher level of attention to socially responsible activities both from the companies they work for or where they purchase goods and services. This expectation can impact an organization’s workforce recruitment and retention efforts along with revenues.
• Better care, research, and clinical outcomes — Health care reflecting specific patient populations — dual eligible, low-income, underserved, rural, minority, and others — can help address existing care delivery needs and improve clinical outcomes. Drug companies and medical device companies can bring diversity into their trials to verify their products are effective on all populations.
• Climate concerns — Health care uses considerable amounts of energy and rare earth metals. This has an environmental impact. Opportunities for alternative energy or innovations may address the “E” in ESG while potentially also reducing business expenses.
• Stronger communities — The rise of “anchor institutions” is an example of health systems embedding deeper into their communities, including working to employ local vendors and contractors and providing access to needed items like fresh groceries in food deserts. In doing so, the local community’s health and economic strength can be improved.

ESG controversy

While more common in the European Union, the ESG movement faces pushback in the United States. The effort to formalize and require ESG is viewed by some as significant government overreach into what should be business decisions. Some may also see it as advancing a specific political agenda.

Earlier this year, the U.S. Labor Department released a rule to allow pension fund managers to consider ESG in investment decisions. Republicans in both the U.S. House and U.S. Senate voted to stop the rule (with several Democrats joining). Biden vetoed their bill.

There also are numerous bills banning ESG requirements introduced in state legislatures across the country, setting up fights in state capitals, as well.

How we can help

While far from a settled issue in the United States, ESG is an emerging area of activity to watch. It may be a consideration in various deals (see CLA’s private equity blog), lease agreements, investments, and global business ventures. Even absent any type of formalized ESG framework in the United States, it may still provide actionable ways for organizations to advance initiatives of importance to them and differentiate themselves in the market.

If you have questions on the recent IRA credits or are interested in learning more about ESG, our sustainability and ESG team is ready to assist. Contact us for assistance.