ESG Pullback Creates Opportunity for Senior Living to Buck Trend, Attract Investment

Environmental, social and governance (ESG) investments are growing within the senior living sector, as we reported a month ago.

But just as our article appeared, a KPMG survey of more than 1,300 CEOs was released, with a contradictory finding: Half of respondents are “pausing or reconsidering” planned ESG efforts within the next six months, and 34% have already hit pause.

This pullback is taking effect even though nearly 70% reported increased demand from stakeholders for more ESG transparency and reporting.

“I heard about the survey in three or four different ways — it’s been on my mind since then, as I’ve tried to make heads or tails out of why people are responding the way they are,” Enlivant CEO Dan Guill told me last week.

In this week’s exclusive, members-only SHN+ Update, I analyze the ESG disconnect and offer key takeaways, including:

• Senior living owners and operators must shift from a checkbox to a strategic ESG approach
• ESG will drive senior living consolidation that is already gaining momentum
• The importance of Sabra’s plans for an ESG fund that operators can tap
• Quantifying social ESG efforts should be an industry imperative to attract investment

From checkbox to strategy

Panels on ESG have become common at senior living industry events, and I find these sessions usually are pretty tough to sit through — presenters share a mind-numbing amount of metrics touting their performance on ESG initiatives, and the conversation is largely technical, focused on reporting requirements and mechanisms.

I understand this focus on data gathering and reporting. New Securities and Exchange Commission (SEC) regulations are coming, investor demands are rising, and many senior living operators are scrambling to keep up.

“Of course they’re frustrated with [reporting], because no one has time to do anything,” Juniper CEO Lynne Katzmann told me. “For an operator who’s in the trenches trying to fill shifts, it’s an added burden.”

The burden feels especially acute right now, given the pandemic-era pressures that operators face, she noted.

But my fear is that these conference sessions and the fixation on reporting mechanisms reflect a “checkbox” approach to ESG.

“If ESG were driven solely by regulatory requirements, then one could argue that meeting these requirements would only require a simple box-checking exercise. Organizations responding in such a manner would be in compliance, of course, but would miss the overall strategic implications related to ESG,” Ingo Steinhauser, senior account executive at Thomson Reuters, wrote in August.

I believe a check-box mentality helps explain the disconnect in the KPMG survey, as executives spooked by economic uncertainty pull back on ESG efforts above and beyond compliance, to save money in the short term.

Steinhauser argued that a company with this “compliance mentality” ultimately will fall short of investor and customer expectations and could be “unprepared for future risks.” Instead, ESG efforts should be woven into long-term business plans, “with a clear understanding of the risk and opportunities.”

It’s a point that Enlivant’s Guill echoed.

“The durability of the commitment relates to overall, what is the strategy of the business,” he told me. “… Our vision is to become the most trusted senior living provider.”

With these principles in mind, Enlivant will continue to invest in ESG and Guill views reporting — however onerous — as a key mechanism for building transparency and trust. Early in 2022, Enlivant became the first senior living provider to earn the WELL Health-Safety Rating for Facility Operations and Management across its entire portfolio. The creation of a new parental leave policy is another recent ESG initiative at Enlivant.

Juniper’s Katzmann likewise emphasized the need for a long-term strategy, highlighting that a pullback on ESG initiatives might free up cash today but will leave providers at a disadvantage in terms of reducing major expenses down the line, including in a recession.

At Juniper, costs have risen in three primary areas, she said: staffing/wage levels, food and utilities. Looking at utilities alone, there is a panoply of steps that providers can take — from swapping out incandescent bulbs for LEDs, to balancing HVAC systems, to harnessing alternative energy sources — that can meaningfully improve the bottom line while furthering ESG goals.

Bottom-line benefits of ESG are being quantified, including by investment firm Harrison Street.

“We’ve done case studies where we’ve gone into communities and done something as simple as putting in low-flow water fixtures that may cost [say], $360,000 to do across a section of our portfolio,” Harrison Street’s Chief Impact and Sustainability Officer Jill Brosig told SHN. “But we’re saving $450,000 from the first year.”

Ascent Living Communities’ Hilltop Reserve project in Denver is the first senior living community in Colorado earn LEED Gold Certification, and is the largest senior living community in the United States to achieve this distinction, according to Ascent Co-Founder Tom Finley. Photovoltaic solar panel’s on Hilltop Reserve’s roof generate enough electricity for 60 single-family homes annually and are generating “significant reductions” in the property’s utility costs in its first months since opening.

“In the past, a majority of the financial incentive for green building and LEED certification has been focused on savings in operational expenses. However, as ESG investing has become more
prominent in the investment community, we’re beginning to experience a three-lane avenue of payback
– operational costs, interest rate savings with green financing and increased valuation through adjusted
cap rates that are happening with certain institutional investors,” Finley wrote in an opinion piece shared with SHN.

Despite such metrics and trends, I think it’s notable that only 45% — less than half — of KPMG survey respondents said they agree that progress on ESG initiatives improves corporate financial performance. 

That statistic points to the ROI complexities of ESG, including the need to consider the upfront costs. Finley is blunt about these cost issues, as they relate to green building practices and certifications, writing:

“The challenges, unknown returns on investment and a growing list of escalating costs seem to have kept the green building/LEED certification initiative from truly taking off. While the concept always feels right, the added expenses required to fully implement these tools are often the first items cut before the shovel hits the dirt. In short, our industry’s response has been, ‘green building and LEED Certification is important, but not enough for us to actually build them out.'”

These issues underscore the importance of financial support that senior living investors are offering as they raise expectations for senior living providers — and suggest how costs related to ESG could be one more factor propelling industry consolidation.

ESG to drive consolidation

Making long-term ESG investments is not easy when margins are squeezed as mercilessly as they are right now.

In this environment, efficiencies of scale and the backing of capital partners with deep pockets can help in maintaining a long-term strategy. Enlivant, for instance, is one of the largest U.S. senior living providers and is owned by TPG Capital and Sabra Health Care REIT (Nasdaq: SBRA), which counts Katzmann as a board member.

Like other large REITs, Sabra has committed to an ESG strategy. And — while raising expectations of operating partners — Sabra is also providing financial support to enable ESG projects.

The REIT is putting together a fund to enable operating partners and lessees to borrow money for ESG projects, paying back the loans through the savings that are generated, CEO Rick Matros told me. The goal is to start the fund at $5 million and have a few projects initiated by the end of 2022.

Efforts like these should lead to more efficient and attractive senior living communities for consumers and workers alike, and create competitive advantages compared with providers that do not have the wherewithal — financial or operational — to make similar investments.

The result will be more industry consolidation, particularly as ownership groups with shorter time horizons balk at the investments needed to keep up with the competition, and seek an exit.

“My sense is that on the investment/financial side, there are people who don’t want their dollars to have to be put into things that are longer-term in nature; they’re much more short term and want to see quick payoffs,” Guill said.

Tremendous opportunity in ‘S’

As ESG reporting has ramped up in senior living, environmental metrics have dominated. Senior Lifestyle Vice Chairman and Chief Investment Officer Jerry Frumm believes that reporting will become “more robust as the movement gains momentum,” but he is unsure “what form social and governance reporting will take, if any.”

Quantifying the “S” and reporting those metrics should be a senior living industry imperative, to differentiate the sector and attract increased investment.

“Our industry and the companies within it have a unique opportunity to tap into the ‘S’ in particular,” Guill said.

Frumm and Katzmann made similar points.

“Senior living provides a natural platform for addressing social impacts as each of our communities seeks to become a valuable resource in its larger community,” Frumm told me. “Review of initiatives focused on wellness, livability, resident and overall community engagement play a role in assessing our social programming. To the extent that workforce issues continue to challenge community operations, the social side of team building has taken on an increasingly important role.”

And Katzmann stressed that senior living providers can “make our mark on the ‘S’ side.”

“What we do is take care of older adults and improve on the lifespan and, as we call it, the wellspan of older adults. That’s our purpose,” she said.

This purpose can be described as anti-ageism and providing care for a disenfranchised part of the population, and can be framed in the context of improving health equity, she pointed out. And many providers are focused on workforce initiatives, including improving wage rates and career development.

“All of those things fall under the ‘S,’ and we’re doing a lot of them — we just haven’t focused on the fact that they can contribute positively to how we’re viewed by investors,” Katzmann said. “We have tremendous opportunity in ‘S.’ We have to recognize our opportunity and promote what we’re doing.”

Academic scales designed to measure quality of life offer one way to quantify the “S,” but Katzmann thinks that senior living providers can start with simpler metrics, such as tracking the number of workers retained over time who availed themselves of career training or development programs. In another example, all Juniper associates will go through LGBTQ+ training.

“That’s as simple as, you do it, you report on it,” Katzmann said.

This sounds easy enough, but the senior living industry has struggled to tell its story on its own terms in the past, and has had to constantly dispel myths and misconceptions even when the stakes have been at their highest. The education efforts required on Capitol Hill to capture a sliver of Covid-19 relief funding is one case in point.

Harnessing “S” metrics should help the sector tell its story through data, and now is the moment to seize the opportunity. ESG mandates are driving investment decisions across the globe, with ESG playing a role in half of all professionally managed assets within one year, according to Deloitte.

Attracting more investment from firms with a genuine ESG focus could play an important role in supporting the industry’s evolution, creating alternative funding sources, with longer-term capital that is more aligned with efforts to serve the middle market and other key goals.

As Guill put it:

“It should allow us to draw, naturally, additional funds that are looking for a higher impact … one where you have a business that creates value both in a social and economic sense.”