President Biden’s Securities and Exchange Commission is expected to propose disclosures on what we now refer to as ESG. It will be slow going as the Business Roundtable has already expressed opposition. However, the World Economic Forum and the International Business Council have been developing a set of reporting standards that could be applied globally.
The reporting standards, in whatever form they take in the U.S. and abroad, will bring some welcome objectivity and uniformity to evaluating companies under what WEF-IBC refer to as Principles of Governance, Planet, People and Prosperity. A standard, embraced by regulators, will hopefully replace the eyebrow raising MSCI indices and other less than robust approaches.
While most of the ESG interest has been focused on the energy, industrial and automotive sectors, health care’s explosive innovation makes it an ideal area in the coming years. Unlike other sectors, health care providers have been reporting data for over a decade that can be useful while we wait for reporting to be standardized by regulation or voluntarily.
With that in mind, starting with services and facilities we have adapted the P4 standards from the WEF-IBC to the data disclosures already available. We did this by applying research from the U.K. National Health Service, recent published articles like ones in the BMJ and Health Affairs.
The WEF-IBC’s standards pillars of People and Prosperity offer the best opportunity for analysis. For example, Star Ratings and the Medicare Compare data sets provide an objective assessment of a providers’ ability to avoid unplanned hospital admissions and infections. The Principles of Governance Pillar can also be described through data on False Claims Act and antitrust actions as well as disclosures on data breaches required under HIPAA.
The Climate Pillar is a more problematic. Sustainability reports are generally vague and often not available. However, with the emphasis on supply chain reliability emerging out of the COVID-19 pandemic and the risks it poses, we are optimistic some standards will be voluntarily adopted or imposed.
With reporting yet to be standardized, any sort of index or score seems unfair, MSCI notwithstanding. What we can do it rank order subsectors and companies. For example, we can probably conclude that $TLMD will reduce travel, possibly mortality and enhance outcomes for patients who live outside of large urban areas with robust specialty practices. On the other hand, we know from research in the U.K. that $DVA’s in-center dialysis model increases travel and we know from Medicare data, patient outcomes are not great. In that simple analysis, we would rank $TLMD higher than $DVA.
This approach is far from perfect, but the point of this note is to invite suggestions and modification. Once we settle on a framework, we can organize the data sets around each ticker and reach some conclusions on where an ESG investor should spend their time.
Ideally, any P4 analysis would be accompanied by a look at Tom Tobin’s fundamental view, especially his Microquads. While I move on to Managed Care, feel free to shoot holes in this one. I would love to hear your thoughts.
