Health care executives and treasury departments may meaningfully engage in environmental, social and governance finance this year as we see ESG bonds and loans helping hospitals and health systems reduce capital costs in exchange for providers improving the health of their local communities—something they planned to do anyway.
ESG efforts and corporate reporting frameworks have emerged over the last decade as a way for companies to communicate how their operations are affecting, or could be affected by, society in a way that isn’t captured on an income statement. For example, a commercial fishing company might disclose how rising ocean temperatures could reduce future yields, or a health system might report how it is improving access to care for disadvantaged populations.
And while ESG finance is not new, the concept has become increasingly popular over the past two years. Institutional investors are allocating more capital toward investments that meet ESG criteria, and companies and organizations are rushing to take advantage of increased investor appetite. Health care organizations looking to raise debt should consider how to take advantage of this fervor. After all, the more investors willing to invest in any bond offering, the lower the cost of that debt will be.
Investment in fixed income (debt) ESG exchange traded funds (ETFs) has more than doubled each of the last two years. The chart above shows that since 2017 investors have cumulatively invested more than $45 billion into ESG debt instrument ETFs. ETF investment flows are a good way to measure investor sentiment on a specific topic, such as ESG.
This sentiment certainly extends to health care, which issued $33.1 billion in global ESG debt last year: an increase of two times over 2020 ($16 billion), which was an increase of four times over 2019 ($3.9 billion).
Most of the growth in total issuance came from sustainability-linked bonds and loans. Sustainability-linked bonds and loans are tied to specific initiatives such as improving access to health care. The performance of these securities is tied to detailed key performance indicators. In comparison, green bonds are more general, but must promote some type of environmental improvement.
Currently, much of this issuance is occurring in Europe, primarily because in September of 2020 the European Central Bank stated they would allow sustainability-linked debt instruments as collateral. As fixed income ESG securities gain wider adoption in the banking system, issuance will only increase.
For many issuers, this can’t come soon enough. Global money markets are now predicting six 25-basis point interest rate hikes over the next year. Some observers are even forecasting a 50-basis point increase in March.
Increased costs of borrowing will only exacerbate health care organizations’ challenges as they struggle with exploding labor costs and stagnant reimbursement. Issuing ESG debt, particularly sustainability-linked bonds, may help lower health care organizations’ cost of capital for simply reporting on the ESG activities they’re already engaging in.