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Top Ten 2023: ESG-Related Matters

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Based on AHLA’s annual Health Law Connections article, this special series brings together thought leaders from across the health law field to discuss the top ten issues of 2023. In the ninth episode, Deborah Biggs, Principal, PYA, speaks with Michael W. Peregrine, Partner, McDermott Will & Emery LLP, and Anne M. Murphy, Partner, ArentFox Schiff LLP, about some of the recent developments related to environmental, social, and corporate governance (ESG) in the health care industry. They discuss the political and regulatory environment; issues related to tax-exempt status, health equity, climate risk, and workforce culture; and what to expect going forward. Sponsored by PYA.

Watch the conversation here.

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Speaker 1:

A H L A is pleased to present the special series highlighting the top 10 health law issues of 2023, where we bring together thought leaders from across the health law field to discuss the major trends and developments of the year. Support for A H L A in this series is provided by P Y A, which helps clients find value in the complex challenges related to mergers and acquisitions, clinical integrations, regulatory compliance, business valuations, and fair market value assessments, and tax and assurance. For more information, visit pya pc.com.

Speaker 2:

Hello, I am Deborah Bigs, a principal with p y a, and I am here with Michael Peregrine from McDermott, will and Emory and Anne Murphy from Art Fox Shift. Michael Anne, would you like to introduce yourselves today?

Speaker 3:

Sure. Um, Ann Murphy. I'm a partner in the Boston office of Erin Fox Schiff, uh, longtime healthcare attorney, and, uh, have a mix of what I would characterize as senior in-house experience and private practice experience, and looking forward very much to today's conversation.

Speaker 4:

And, and I'm Michael Perrin. I'm a partner in the Chicago office of the McDermott Will and Emory, and my focus is principally on, uh, corporate governance issues for healthcare organizations.

Speaker 2:

Wonderful. Well, thank you both. And you've both authored an article that's, uh, number nine in the Top 10 podcast, um, for H L a, and we'd love to talk about that today. So we're gonna talk about E S G. So, E S G is environmental, social, and corporate governance. Uh, there's a lot to it. I know in your article you say that there's a lot that's gonna happen in 2023, but all this being said, could we start with, is this a thing? If you're, if you're sitting here and you're listening to this, why should you think about it? Why should you bother with it? Is it a movement? Is it real? Can you gimme your perspective on this?

Speaker 4:

Well, um, Debra, I'll let Ann speak for herself, but I think we come from a shared perspective that from the, from the health industry chief legal officer's perspective, it's, it's a, it's a real deal. It's a question of the degree to which they allocate their time. It's not an issue, though. They can push off anymore. It's part of, I don't know, Anne, would you say it's a front burner legal is issue or a back burner legal issue, but still something that they have to have the, uh, the, the flame on a little bit?

Speaker 3:

Yeah, I think the, the question that some reasonable minds can ask has been whether this is something that is real. If this is something that instead, uh, is primarily, uh, to be focused upon by, um, investor owned companies, and whether chief legal officers in the healthcare sector, especially, uh, the not-for-profit component of the healthcare sector should really be paying attention to it. And I think, you know, the answer is yes. Uh, I don't know that I would put it as a front burner issue so much as an issue that needs to be integrated in with things like, uh, workforce considerations and good governance. So it's there. It's real, it's more than just a consultant driven, um, focus, uh, but needs to be put in perspective because as we know, um, healthcare organizations have an awful lot on their plate, and this needs to be put in context.

Speaker 2:

This is very helpful. So you drafted this article a little while ago. What's happened since you've drafted the article? Can you bring this to current?

Speaker 4:

Well, maybe just take a step back, Deborah, just kind of comment on what's, what's happened over the last year or so, just to refresh and underscore, I think what Anne and I view was the fact that it's real and, and the reality if you're going into a, a chief financial officer or a Chief operating officer's office and, and, and you have to make the case, so to speak, for why to pay attention to it, I think the ba there's enough, uh, background developments over the last year or two, uh, to say why this is relevant. And I think we see that in part, obviously, uh, our clients' board members are reading every day about, uh, and we're reading in the legal journals about the s SEC's, uh, action to, uh, address investor concerns about investing in, uh, companies with e s esg, uh, activities that the s e C had something yesterday about maybe backing down on some of their climate, uh, dis disclosures. We see issues about greenwashing and all sorts of other things. Um, but I think what's happened is important because, uh, our, our fellow members can't point to not just what's happening in the investor own sector sector, but also the interests of, um, rating agencies. And we'll talk a little bit more about that later. Certainly HHS and CMS have, have, uh, come down with both feet in terms of the Biden administration's efforts in the office of, I want to get this right and healthcare, uh, uh, change and health equity or the, uh, O C C H E from, uh, the Biden administration, and then the Office of Environmental Justice, which has that scary, uh, sounding title. Both, both of these administrative agents have, uh, are healthcare focused, both have regulatory authority. Then certainly there's the, um, efforts of the Joint Commission, um, and to address matters of health equity and state attorney generals at certain levels are addressing these issues. Well, uh, some favorably, some, uh, uh, less favorably. So I think point number one, uh, is to take a look back and see what's happened over the last two years, Anne, and I would say a lot, and a lot that has specific implications for healthcare organizations. But Anne, uh, you may wanna take the what's new issue.

Speaker 3:

Um, yes, before I, before I get into what's new, uh, one thing that Michael and I have talked about in, uh, our article writing, and I think bears repeating at this moment, is, um, that the conversation is becoming far more granular and sophisticated as it relates to what is actually being measured. Um, so I think some well-placed critiques over the last year or so in terms of how, um, ratings agencies might be deploying an E S G rating system, whether there's internal consistency even within one, uh, ratings agency, and looking at the way that they come out, uh, across, uh, different companies. Um, so, so I think we're going to continue to see focus on, um, those granular issues, because if you don't know exactly what you're measuring, how can you possibly be doing it? Well, um, the other thing that I, I will underscore in what Michael, uh, said is that, yes, there are direct government initiatives, whether you're looking at the S E C or H H s or c M s, uh, but when you aggregate those, um, government measurements and then add to that, the fact that access to capital may well be impacted by your E S G rating, the fact that due diligence, um, is increasingly going to encompass an E S G component, these are things that suggest that for any organization, um, in the healthcare sector not for profit or not having good E s G hygiene, if you will, is probably going to become an important business metric. So, in terms of what's new, I guess, um, what, what I would like to kick this off with is an acknowledgement of the fact that in 2023, um, we are going to see continuing efforts by the Biden administration to shine a spotlight on E S G. Uh, but we are going to see and are already starting to see a vigorous counter response. So this is going to become, I think, a more politicized issue in 20 23, 25. Um, G O p, uh, as attorneys General have sued challenging Department of Labor, uh, rulemaking, uh, we expect to see challenges to the S E C proposed rulemaking. Uh, and I think, uh, we are going to see this become a bit of a political football, uh, over, over upcoming months, which doesn't mean that we don't pay attention to it as attorneys, but I think it is important to acknowledge that it is going to be out there in the public domain as a politicized, um, topic.

Speaker 4:

And, and on top of that, some of the things that Anne and I have been, uh, discussing with our clients on what's new, Deborah also relates to, um, interestingly enough, the, the, uh, the exempt organization tax area are not-for-profit, tax exempt, uh, hospitals and health systems that are represented within the HLA membership. Uh, I think as a lot of our, um, listeners or viewers or whatever they are, are aware, there's been over the last, uh, nine months, a much greater focus in the media, the mainstream media on, um, the continued tax exempt status of large hospitals and health systems that with billion dollar revenues, uh, the New York Times, uh, profits over patients issue has been particularly a painful one, uh, if not inaccurate, uh, uh, uh, serious to read. And, but the, the, uh, the questions of, uh, what are, uh, our clients doing to deserve their tax exempt status is becoming back into focus as it periodically does. The health equity issue, which is a significant discussion, uh, of E S G principles, obviously becomes more significant. Uh, the ability to, uh, of the not-for-profit sector to distinguish themselves in the for-profit sector, uh, does invoke e s SG principles. Uh, the health equity issue is a real one, and to the extent that, uh, the, the Tax m Health systems are reflecting this, addressing this and incorporating this does have an additional benefit, uh, to again, just demonstrate how they are serving their charitable mission. So that's another aspect of what's new. And I'd also point out, Anne and I were discussing, um, we're, we're taping this in, uh, uh, early to mid-February and, uh, the other day, the Texas attorney, uh, governor, uh, essentially banned the use of, uh, diversity equity principles in state hiring. That's a, uh, a, a perfect demonstration of what Anne is talking about. Uh, and, and again, and part of the political and regulatory environment, which we both think E S G is going to become enveloped in. And, and that's going to affect, I'm sure, Anne, don't you think how boards and c and senior executives say, why do I need to pay attention to this? Why can't I just let this sift its way out, and then I'll give it a couple years and then I'll decide?

Speaker 3:

I, I do, I think there, there is, um, a possibility that some boardrooms, uh, will react in that way. At the same time, I'm reminded of the fact that none of us can turn on the news without seeing yet another, um, weather related or mother nature related crisis. And so we are going to have, you know, in addition to all the technical and business issues associated with this important topic, um, we're not only gonna have politics, but we're gonna have the, I think, steady drumbeat of collectively, um, people internalizing the fact that there are significant climate events happening. Um, I saw one recent article classify it as the crystallization of climate risk, and I, you know, I thought that was sort of an eloquent way of putting it. And, um, I, if you think about the fact that within e s g environmental is the most clearly defined, and I do think some of the political back and forth we're likely to see in 2023 will relate to that environmental piece. How much should, um, climate risk be associated with an individual company and its rating? Um, but when we get into the s and the G, the s in particular, I think is where, Michael, to your point about tax exempt organizations, as we get more serious about, um, having better measurement of e, ess and g, the S represents a really significant opportunity for those in the healthcare sector to take what they do every day, whether you classify it as mission or corporate purpose, and translate that into social good benefit to the community, and importantly in an environment in which workforce shortages are at an all-time high. That esque component also deals with workforce culture. And I think thinking about the business case between workforce culture and that s component and what it means to say younger generations of workers to be attracted to a healthcare organization, for example, that is more sensitive around E S G issues, is also a way to crosswalk from what some board members may be articulating as a, show me the money from a business perspective. There are some, you know, direct business cases to be made, and certainly workforce culture is an immediate one in 2023.

Speaker 4:

Absolutely. Absolutely.

Speaker 2:

Can you either of you comment on the G, we've talked a lot about the E and the S Let's talk a little bit about the G governance, corporate governance.

Speaker 4:

I think G is, from my perspective, and I'm pretty biased on this, is, is loosely coupled to the broader concept. If you start, if you look at the, all the, uh, significant discussions of these principles, the hardest one to nail down is G uh, in my view, again, I'm biased. I think G is, is just simply, uh, duplicative of existing governance principles. And, and I, again, this is my bias. I think it's, it's a real deflection from a thoughtful discussion of governance. The is the, the, the G in governance, uh, uh, is, uh, the G and e s g de definitions is poorly defined as Anne was mentioning, and really is just simply a subset of what boards and their governance committees should be looking at in any event. And I think you're starting to see that, um, people are starting to refer to just E and s, and I think mm-hmm.<affirmative> That, for example, the National Association of Corporate Directors recent framework on, uh, governance guidelines does that, uh, the, what I worry about is that, uh, important discussions on corporate governance happen through the portal of E S G, which is, I think, a huge mistake and, and not through the portal of the, the more traditional evaluation of, of corporate governance as legal concerns. So I think that one Anne is, is, uh, if we look, if we're looking at what's on the horizon, I think we're gonna be going from e, s, and G just to e n s.

Speaker 3:

Well, and, and Michael, you and I, I mean, I think we share sort of that frustration, um, the way I make sense of it, and I'm not saying that this is the right way, but if you look at e, s and and g at its most basic, uh, sort of level, it's a system that is intended to measure certain very specific metrics and, um, to then hold the organization accountable to those metrics. And how do you hold the organization accountable? Ultimately, it's through the board, it's through governance, um, it's through executive compensation and a committee structure that takes seriously the identification of the E S G measurements in the first instance. So I think having good governance is necessary for effective, um, e and s at least. Uh, so you, you need the g in some ways in order to make the first two elements effective, but it is a bit of apples and oranges because I think, you know, to your point, Michael, governance is so much broader, obviously, than simply the measurement of, um, of those two elements. And so to tack the g on runs the risk of either diminishing governance writ large or confusing the relationship between governance and the environmental and social justice issues.

Speaker 2:

Well, you've both made a compelling case that you have to be paying attention and that this is here to stay, I believe. So when you're thinking about what's on the horizon, what's your perspective,

Speaker 4:

Debra? I think our view is that there are a couple of things that are going to become more significant from this. Uh, and future Ann's point about watching the, how the political situation evolves is gonna be a significant one. And, and, uh, not to be a political pundit, but the question of who is in the White House, it could affect the future of certain federal commitments such as, uh, h h S's focus on, uh, e es and G principles. So that's, that's a significant one. The general council's gonna be challenged to come push back on what Ann was saying and saying, won't this go away in 2026 with the change of administration? And that's a tough one, uh, to, to argue against. But I think from, from our perspective, two things that are really important though that are, that won't go away is that the role that, that Moody's as and, and maybe other credit rating agencies are exempt to which they are considering E S G factors in their overall credit analysis. To me, uh, that that is bringing home, as Anne said, the the business case for this focus on this entire issue, it becomes a much more significant consideration for the chief financial officer and, and the chief legal officer. And as more organizations go through a Moody's style consideration, um, they will be getting the reli relig, there will be more focus on getting the religion. Uh, I I other also think that, um, the continued focus of the Joint Commission on health equity issues and related issues, again, brings this very much home, makes this very clear on a operational level to our clients. And so those are the two issues that I would flag as, uh, apart from the political issue that's on the horizon that I think will really manifest the importance of E E N S principles to our healthcare clients.

Speaker 3:

And I can't say it, um, better than that. Uh, I would simply add, um, that the chief legal officer does serve as that voice of reason, uh, from time to time in the executive rooms or in the boardroom in terms of why something like this either does or doesn't, uh, deserve priority attention. And I think, um, from my vantage point, the reason that e s G ends up on the top 10 list for A H L A is because it is something that is a significant movement, yes. But it is also, um, a movement that has now, um, made its way into government regulation and ratings that impact the financial health of our clients. And so from a chief legal officer's perspective, to be able to answer that question when it's raised in the boardroom or the executive suite and say, yes, it matters. We don't need to lose perspective on this, but we do need to have a focused clear point of view on this one that, um, in the boardroom is capable of being expressed and deployed. I think that is important, and I think it will continue to be important, um, not just because it will be a topic of common interest and um, sort of political debate, but because it does speak to the bottom line and the mission of the organization.

Speaker 4:

And, and Deborah, if, if, if we were, if Anna and I were to predict, you know, uh, something in 2023 that could be very significant in this area, uh, it could well be the decision by a progressive state attorney general to more vigorously enforce and apply, uh, e n s principles on healthcare facilities in particular, uh, with a focus on health equity. That would certainly be one of them. Uh, a another could be, uh, actual regulation proposed by the Office of Climate Change and Health Equity, uh, uh, department at h h s that would apply to healthcare institutions, you know, something either at the federal state level, proposed regulation or clear enforcement practices, which would just bring this right home, uh, to healthcare. So I think our view is, you know, do, do you wanna, if you're the chief legal officer, do you wanna have to consider this? Maybe not. I mean, it, it's on the, on the other, on the range of issues that are on your desk. This is probably one, if you could push off the edge of the desk for a while would be great. Can you? Probably not. Uh, it's, and even though there's tremendous frustration with the standards by which these are evaluated, as Anne has pointed out, um, ultimately our responsibility is to point out to, uh, if we're a Chief legal officer to our internal clients saying, you gotta keep in mind when these stories pop up in the journal or the times about E S G, you need to skim'em. You need to be aware that, that these, I implicate our industry in a variety of indirect ways and with Moonies and the Joint Commission with some direct ways. So again, it's, it's certainly within, it's a legitimate concern that needs to be addressed at the management and board level, uh, going forward in 2023.

Speaker 2:

Well, Michael, and thank you both very much. I think that, uh, as we started out this conversation and saying, this is something you have to think about, you've made it a, a compelling case that it is something you have to have a thought process on it. And Anne, as your point, a point of view, how to answer these questions to your board or other constituents, and, uh, having these both hit Moody's and the Joint Commission really seems to me it's here to stay. And we'll be talking about this again in the future.

Speaker 4:

Thank you, Deborah. We sure appreciate the chance to talk to you.

Speaker 3:

Yes, thank you so much.

Speaker 1:

Thank you for listening. If you enjoy this episode, be sure to subscribe to a H L A speaking of health law, wherever you get your podcasts. To learn more about a H L A and the educational resources available to the health law community, visit American health law.org.