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Perspective published on August 13, 2018

How Nonprofit Hospital ESG Disclosures Can Help Investors

As interest in sustainable investing grows, so does investor demand for improved disclosure of environmental, social and governance (ESG) risks. Bond investors increasingly seek to compare the ESG characteristics of borrowers within the same industries (see our podcast, SASB and ESG Reporting Standards). But while disclosure of material ESG factors has become mainstream in the corporate space,1 it remains limited and ad hoc in the municipal bond market.

In our view, many municipal issuers are missing out on opportunities to inform market participants of their ESG efforts. Nonprofit hospital issuers in particular are often doing the work that sustainable investors value, but are failing to disclose their progress. In this blog post, we focus on the state of ESG disclosure in the nonprofit hospital industry, and the opportunities for increased transparency.

ESG Efforts Align with the Mission of Nonprofit Hospitals and Can Enhance Credit Fundamentals

Nonprofit hospitals exist to benefit the communities they serve, which underpins their tax-exempt status and their eligibility to receive charitable donations. By their very nature, hospitals’ goals—to help people and serve their communities—align closely with the ESG themes fixed income investors prioritize when evaluating issuers. We think hospitals’ ESG-related initiatives can also contribute to improved credit fundamentals over time. However, in many cases, hospitals have failed to adequately and consistently disclose these efforts to investors. Consider the following examples:

Environmental. Many hospital systems actively seek to reduce waste, conserve energy and lower their carbon footprint. These efforts can reduce operating costs, which is essential for an industry where margin growth is likely to remain constrained for quite some time. One example is Kaiser Permanente. This multistate hospital system, which serves 12.2 million patients across nine states,2 announced plans to attain LEED certification3 on all future hospital construction. The change is likely to lower future energy bills, reduce carbon pollution and have a significant long-term impact.

Social. Market forces and mandates under the Affordable Care Act (ACA) have pushed hospitals to promote improvements in public health. Provisions of the ACA require hospitals to focus on helping people in their communities across the continuum of care. The aim is to lower costs by reducing hospital visits, and a healthier population can help accomplish this goal. For example, Geisinger Health has launched a “Fresh Food Farmacy” that gives away healthy food to patients who are diabetic or pre-diabetic with the goal of “improving healthy behaviors of residents in [Geisinger] communities.” For every $2,200 spent per patient per year on the program, Geisinger estimates a medical cost reduction of between $8,000 to $12,000 on average per person per month.4 We believe that efforts like these are growing in frequency across the country.

Governance. As hospital systems merge and become more “corporate” in terms of their size and scope of services, reputational risk and managerial competence become more important credit concerns. The perception of and public support for a hospital system are increasingly important to its long-term success. Effective management teams and engaged and diverse boards of directors are often better equipped and more prepared to handle controversies and risks associated with corporate size. Recent examples of hospital-related reputational risks include an Ebola virus scare at Texas Health Resources in 2015, and ongoing ransomware attacks faced by many hospital systems that threaten to release sensitive patient records absent a payment from the hospital.

Hospital ESG Disclosure Varies Widely Among Systems

Hospital financial disclosure is already more comprehensive than that of other municipal sectors. In our view, nonprofit hospital systems are the most “corporate-like” of the major municipal bond sectors. Hospital systems often manage multiple facilities and thousands of beds across multiple service areas. For this reason, investors have tended to demand more frequent and corporate-like financial reporting. Unlike their municipal peers, hospitals often report financial performance quarterly.

However, we believe more consistent ESG disclosure is needed. More comprehensive ESG disclosure is achievable and would likely benefit hospitals by improving their market access over time. ESG reporting frameworks exist in the corporate space (from organizations like CDP, GRI, SASB, and TCFD), but they are largely lacking in the municipal market. Further, a growing subset of corporate issuers are publishing Corporate Sustainability Reports (CSRs), but we find this practice lacking in nonprofit healthcare systems.

We think hospitals are ideally positioned to lead the way in greater municipal disclosure. Notably, the Healthier Hospital Initiative, which challenges hospitals to take on initiatives such as producing less waste or serving healthier foods, provides a framework for disclosure of some ESG-related issues. However, participation and reporting are voluntary. Certainly, where a hospital system has a CSR, it could be more prominently highlighted in its offering statements or on its investor relations website.

In our opinion, Cleveland Clinic, which publishes an online report in accordance with the Global Reporting Initiative (GRI) and includes a materiality assessment (see Our Sustainability GPS), is a leader among its peers when it comes to sustainability reporting.

The Importance of Information for Investors

Municipal bond investors may seek ESG disclosure for various reasons. Some investors want to ensure that their capital is helping fund projects that will benefit society. Others believe in the investment case: Considering ESG criteria can help mitigate risks in a bond portfolio. Mainly, standardized ESG disclosure can help investors compare ESG performance across borrowers on an apples-to-apples basis.

A lack of ESG disclosure by hospitals could prevent investors from deploying capital in some cases. Low levels of disclosure make it difficult for municipal investors to determine which hospitals are funding projects that are truly sustainable and are bringing corollary benefits to society. These concerns are of increasing importance to a growing subset of investors.

Greater transparency from hospitals would allow us – and others – to better analyze hospital system sustainability and overall credit quality. We believe that over the long term, better ESG performance leads to stability of profits and margins at hospitals, as hospital ESG efforts can indicate better and more sustainable cost controls.

Examples used in this blog are for illustrative purposes only. They do not necessarily represent past, current or future holdings in any client portfolios, and are not intended to be investment recommendations.


[1] Bloomberg ESG Disclosure metrics of S&P 500 companies, per J.P. Morgan, over the period 2010 to 2017.

[2] Kaiser Permanente, as of July 27, 2018.

[3] LEED, or Leadership in Energy and Environmental Design, is the most widely used green building rating system in the world. It is available for virtually all building, community and home projects.

[4] Harvard Business Review, “How Geisinger Treats Diabetes by Giving Away Free, Healthy Food, October 25, 2017, by Andrea Feinberg, MD, Jonathan Slotkin, MD, Allison Hess and Alistair Erskine, MD.

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