Healthcare providers proposing to adapt their buildings to better manage Covid-type risks and overheating might want to take the opportunity to future proof their buildings by increasing their energy efficiency and installing solar PVs or other low carbon heating. With the availability of sustainability-linked loans and bonds at advantageous interest rates, either with specified use of proceeds provision or dependent on the achievement of certain KPIs related to metrics which are clear and increasingly common for the “E” of ESG, retrofitting works could be financed in this way. Last year Primary Healthcare Properties refinanced with Aviva Investors using a sustainability-linked loan with KPIs based on improvements in EPC ratings and, for new developments, higher BREAAM ratings.
There’s a further commercial imperative to pursuing energy efficiency schemes in the context of health and care real estate assets.
Pinsent Masons colleagues recently highlighted the bifurcation that is already happening in the office sub-sector of the commercial real estate market in respect of demand for and the value of office buildings that conform to high environmental standards and those that don’t. The same is true of health and care real estate. As the market evolves further and environmental factors play more significantly into real estate pricing, there is a risk that investors are left with stranded assets that they are either forced to invest substantial capital into improving the energy efficiency of or sell those assets off at a cut-down price – though for others, stranded assets might present an investment opportunity.
We also expect environmental risk management in healthcare to be significantly driven in the UK through the NHS and its procurement policies. NHS England, for example, has set net zero targets (76-page / 2.3MB PDF) which include seeking to be net zero in respect of its ‘Scope 3’ emissions, namely the emissions which come from its supply chain, by 2045.
Under NHS England’s net zero supplier roadmap, which lays out a trajectory of actions for suppliers, from 2030 suppliers will only qualify for NHS contracts if they can show progress on reducing their own emissions.
The concept of social risk in the context of ESG is perhaps something health and care providers will feel they are already addressing by virtue of the nature of their business – delivering high-quality health and social care is itself an activity that falls squarely in the UN’s Sustainable Development ‘goal 3’ of good health and wellbeing.
The reality, however, is that social risk in health and care needs to be viewed through a wider lens. It clearly encompasses other responsible business factors, such as policies and practices affecting employees.
In this context, diversity and inclusion is increasingly important. Health and social care providers will want to review and, if necessary, revise boardroom representation targets, and consider their approach to recruitment to understand and address any inherent bias, for example. Mechanisms for supporting women returning from maternity leave or living with women’s health conditions are also relevant, as are policies around flexible working and parental and carer’s leave.
In health and care, much of the workforce is made up of women. This can present a risk that misleading comfort is drawn from gender pay gap (GPG) data. In this context, health and care providers will not want to measure progress against the economy-wide average, but rather consider whether their GPG stands up to scrutiny against that of other providers in the sector – and take action if it doesn’t.
Further guidance on what is meant by the ‘S’ in ESG is anticipated when the EU releases its social taxonomy, intended to underpin the EU’s Sustainable Finance Disclosure Regulation, which has relevance for investment in real estate assets.