Demonstrating a commitment to environmental, social and governance factors can broaden the investor pool for not-for-profit healthcare bonds but organizations should tread cautiously as disclosure practices evolve, Kaufman Hall’s Lisa Goldstein wrote.

“ESG has already become a significant consideration for investors in taxable debt,” Goldstein, a senior vice president and member of the advisory firm’s Treasury and Capital Markets practice, wrote in a blog post this week. “If its significance continues to grow in tax-exempt municipal debt, not-for-profit health systems will need to develop an ESG strategy.”

Hospitals and systems need to educate their boards on the rising level of attention on ESG among both investors and rating agencies.

“They should also begin conversations with their rating analysts on expectations for ESG-related information in rating meeting presentations,” Goldstein wrote.

Some hospitals and systems have already begun to devote more space and discussion in offering statements and investor presentations to ESG.

“Hospital leaders must think carefully about their approach in expanding ESG disclosure,” Goldstein wrote.

Topics that hospitals should expect to cover for rating agencies and the buy side include climate change weather events, business continuity and resiliency plans, vendor and supplier selection based on environmental goals, sustainability and recycling efforts and carbon-emission reduction which fall under the environmental sphere.

Strategies to recruit and retain a diverse workforce, aging population and behavioral health needs, disparities in healthcare outcomes among socioeconomic groups, social determinants of health data and usage, and responsible production of good and services fall under the “social” category.

Board and C-suite diversity and selection process, cyber preparedness and management, alignment of executive compensation with ESG goals, effective whistleblowing mechanisms, and leadership role for ESG initiatives fall under “governance.”

While a heightened focus on ESG and the use of green and social labels can broaden the investor base, cost benefits have yet to be seen in pricings.

“There have not been significant savings or ‘greeniums’ from ESG-focused debt issuance in not-for-profit healthcare,” Goldstein wrote.

The benefits of focusing on ESG, however, can extend beyond a direct market impact with the commitment potentially helping with professional recruitment especially among younger generations and it fits well in with the stated mission of the NFP sector on community-centered care.

ESG poses disclosure benefits and challenges. Hospitals and systems that get out front on the subject could help shape disclosure standardsdisclosure standards..

The International Capital Market Association provides definitions and voluntary process guidelines for the issuance of green and social bonds and rating agencies have developed scoring systems to assess ESG’s impact on credit, but practices are still under development and receiving regulatory scrutiny.

“Given the still nascent state of disclosure standards for ESG-related information, health system leaders may want to take a measured approach to more robust ESG disclosures,” Goldstein wrote. “If they are considering a new debt issuance, they should monitor the extent to which ESG is influencing investor decisions and work closely with their financial advisors and debt counsel in determining the content of any ESG disclosures and, especially, any commitment to ongoing disclosures.”

A commitment on ESG in disclosure will require resources from hospitals and systems on data gathering and reporting and “it may be difficult to disengage if other priorities emerge,” Goldstein wrote.

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