Environmental, Social and Governance (ESG) strategy is an increasingly more common consideration for those undertaking healthcare M&A or capital investments. The nature of healthcare poses unique ESG risks in terms of community impact and involvement, retention in the workforce, and environmentally friendly buildings and medical supplies. As ESG concerns continue to become more important to investors and acquirors—and as government regulations increasingly necessitate movements towards ESG-friendly business practices—both for-profit and non-profit entities in the healthcare industry need to ensure that proper ESG standards are maintained.

Acquirors seeking to purchase a healthcare entity or those seeking to invest in such an entity should carefully vet the target to ensure the target’s ESG strategies and goals are consistent with the acquiror’s or investor’s own. The failure by a target to maintain an ESG strategy or goals—or a target having ESG programs or strategies substantially different than the acquiror’s or investor’s own—could potentially harm the economics of a deal and create public relations difficulties if the deal closes. In extreme cases, a failure to show awareness of and intent to maintain or improve upon ESG metrics can affect the purchase price as the acquiror or investor will not want to pay a premium for targets that have lax ESG standards. Acquirors and investors should make certain that ESG issues are added into or built into their standard due diligence checklists to ensure alignment of their respective ESG values and the target entity. Below are some of the factors that comprise ESG due diligence for a healthcare entity and that should be considered as part of any due diligence checklist of a healthcare entity acquiror or investor:

  • Access for Low Income and Diverse Patients: Throughout the US, many people lack access to adequate, affordable medical care. Compounding these economic difficulties are additional racial disparities in the quality and accessibility of healthcare, such as with disparities in maternal health outcomes in obstetrician clinical care. Diversity, equity, and inclusion training should be mandatory for those playing a role in patient care. As far as accessibility, the telehealth industry continues to expand quality care to those in rural areas post-Covid, despite inequities in access to broadband leaving some communities behind. 
  • Energy Management: An average US hospital uses 31 kilowatt-hours (kWh) of electricity and 103,600 Btu of natural gas per square foot annually, according to Friendly Power. This includes usage for high-powered air filtration, temperature control, specialty lighting systems lights (such as 24/7 stairwell lights or operating rooms), lab equipment, and other machines used for patient care, like MRIs. As such, hospitals are heavy consumers of energy that stand to benefit in multiple ways from the emerging alternative energy infrastructure. Such measures cut costs, reduce price volatility, and ensure that healthcare facilities are compliant with rapidly evolving government regulations regarding carbon emissions. The benefits are tangible: NYC Health + Hospitals, the largest municipal health care system in the U.S., reported receiving $1.4 million from Con Edison for reducing energy use using green technology during extreme summer heat in the summer of 2020.[1]
  • Employee Recruitment, Training, and Retention: As an industry reliant upon skilled labor, recruitment and retention of employees is critical to healthcare organizations. These issues have been magnified by the pressures of the Covid pandemic as healthcare entities were forced to pay a premium for travel nurses and similarly contracted roles. More consistent scheduling, fully staffed shifts, and programs designed to make employees feel valued can help retain workers and ensure their wellbeing as stakeholders in the larger healthcare ecosystem while simultaneously saving money on costs related to turnover. 
  • Climate Change: Jodi Sherman, M.D., associate professor of anesthesiology at the Yale School of Medicine, estimated the healthcare industry is responsible for almost 10% of greenhouse gases in the US. Many healthcare organizations are beginning to act. In one organization’s annual ESG report, AMN Healthcare laid out its new strategy for achieving a net-zero carbon footprint from their own operations by 2024. By implementing more efficient building designs, utilizing solar power, and increasing the efficiency of supply lines, hospitals can dramatically reduce their impact on climate change, while also introducing efficiencies that reduce costs and improve profitability. 

Just as healthcare entities on the acquisition trail should incorporate ESG considerations into their diligence checklists, those looking to be acquired or to attract investment capital should implement ESG programs as a part of their long- and short-term core business strategies. This will make targets more attractive to buyers. Otherwise, a lack of ESG adherence may make them untouchable to bigger, more regulated, and ESG-conscious entities, damaging their overall valuation in the market. Some of the common ESG measures adopted by players in the healthcare industry include:

  • looking internally, examining their company culture and their commitment to diversity, equity (including pay equity) and inclusion, as well as examining the vendors and suppliers with which they deal and their commitments to diversity, equity and inclusion, replacing those vendors that don’t share the same commitments;
  • becoming involved in the communities that the healthcare operations serve, leading and sponsoring community activities, creating a foundation to demonstrate a charitable corporate character, and participating in community celebrations of diversity;
  • setting the “tone at the top” by establishing governance policies and promoting adherence to such policies to encourage ethical behavior and implementing reporting and oversight systems designed to root out and eliminate things like sexual harassment or activities such as money laundering;
  • creating cybersecurity and data privacy measures and implementing accompanying policies that are adhered to and enforced, allowing consumers perhaps more control and rights than are legally required to sow trust among the consumers;
  • keeping accurate logs of relevant metrics in order to substantiate green marketing claims that are being made or planned to be made to consumers; and
  • setting targets for diversity on their respective boards of directors and in senior leadership, including addressing inequities in the applicant pipeline as well as implementing hiring processes such as committing to interviewing at least 30 percent people identifying as female as well as people of color for all open C-suite positions as well as senior leadership promotions.  

ESG considerations may affect the purchase price an acquiror will pay and could determine whether an acquiror is interested in the target at all. Conversely, some of those same ESG considerations should be implemented by owners of companies looking for an exit strategy via acquisition. Companies seeking to be acquired or seeking investment capital may choose to incorporate the ESG due diligence considerations acquirors and investors are looking for into their own ESG goals and programs to the extent they can make them part of their core long- and short-term business strategies.

[1] https://www.nychealthandhospitals.org/pressrelease/more-than-1-4m-earned-for-additional-green-projects-system-wide/

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Photo of Craig Adoor Craig Adoor

An experienced advisor on securities along with mergers and acquisitions, Craig is skilled at crafting win-win transactions that result in strong and productive relationships. Craig provides results-oriented business advice to boards and senior management of both publicly held and large private companies.

Photo of Lynn Ryan Lynn Ryan

Lynn brings excellent language abilities and an understanding of business concerns to corporate work. Before attending law school, Lynn taught English as a Second Language through Teach for America, translated for parents within a large, urban school district, and helped a philanthropic venture…

Lynn brings excellent language abilities and an understanding of business concerns to corporate work. Before attending law school, Lynn taught English as a Second Language through Teach for America, translated for parents within a large, urban school district, and helped a philanthropic venture clarify data for investors. Lynn knows there is always a way to make sophisticated and technical ideas comprehensible. She uses her skillset as a former educator to efficiently communicate with stakeholders when working towards legal solutions. Furthermore, her training in literary translation gave rise to her detail-oriented nature and awareness of ambiguity – a true asset to clients when drafting commercial contracts.