At Ethical Partners, it is our opinion that currently the ethical risks of investing in the listed aged care sector is too high. Our position is based on the lack of achievement of minimum standards of care across the industry generally and the corresponding impact this has on human rights. Aged care stocks are rated as High Risk in our EPORA (Ethical Partners Operational Risk Assessment) and are not part of our investable universe. We have not owned them since the inception of the Ethical Partners Australian Share Fund due to both ethical and valuation-related risks. We would need to see considerable change in the business model, transparency and disclosure, staffing, training, monitoring and codes of conduct in order to consider investment in the future.
Our concerns have sadly been well and truly borne out by the Royal Commission into Aged Care Quality and Safety, which has heard over 6000 reports of the lack of oversight and widespread lack of care in our aged care system. Public submissions and many experts have detailed an endemic lack of regulation, unmet demands for care, lack of staff, and a “dictatorship type industry” with little way to pass on feedback to management or improve care. Witnesses have talked at length about psychotropic misuse, elder abuse, lack of food safety, inadequate ratios of qualified staff, lack of staff training, poorly resourced facilities, and an inability to provide individualised, patient centred care. There have been allegations of maggots in wounds, medicine mishaps, the overuse of restraints and unpalatable food, an unregulated workforce, malnutrition, shortage of supplies and assaults. An unacceptable rate of pressure sores, the rationing of incontinence pads and gloves, and a lack of transparency are also reported. Commissioner Lyn Briggs has called the system, “a national disgrace”.
The Royal Commission has recently been extended for another six months and another commissioner added. There has also been a worrying minimisation of complaints, lack of adequate reporting and even defensiveness in listed aged care companies’ response to assaults on patients in their homes. The results of the Royal Commission into Aged Care Quality and Safety are sadly not surprising to those who work in the system, who believe these reports are the tip of the iceberg and simply confirm what they have been reporting for years.
Furthermore, a Senate inquiry into the aged-care sector in February also found evidence of “systemic issues that negatively impact the quality of aged care services” throughout Australia.
Additionally, Human Rights Watch has recently called the use of medication to make dementia patients more manageable a “serious human rights violation”. The government has recently released new regulations to prevent the excessive use of physical and chemical restraints, but experts and human rights group agree that the answer is staffing and training, not just legislation.
How Ethical Partners reviews its position
In the words of Senior Counsel at the Royal Commission, at least one of the listed aged care stocks, “did not live up to its stated and published values of honesty and integrity” The defensive and underwhelming management attitudes, including a worrying lack of remorse and humility at the commission have added further weight to our concerns.
This is absolutely key for us. Our investment approach considers both the past behaviour of a company and what the likely future behaviour will be. We consider a five step process in order to change our view on a sector or stock undergoing ethically-oriented challenges:
1. A clear and frank acknowledgement by the Board and Management that past conduct was unethical, inappropriate and not in the best interests of stakeholders. This can be accompanied by senior resignations and/or structural changes within an organisation in addition to remediation / compensation of stakeholders where appropriate;
2. A full review of policies and procedures within an organisation with a genuine commitment to making material improvements in how a company operates;
3. A high likelihood of significant changes occurring in a reasonable time frame;
4. A high level of transparency and disclosure throughout the period of change;
5. A commitment to measuring and reporting upon the changes once made over the medium to long term
In our view, the aged care sector does not currently satisfy any parts of our five step review.
Staffing levels critical
One of the major issues that has been identified is staffing. Despite substantial evidence that links staffing numbers to the quality of care received, aged care providers are currently not sufficiently obligated to provide the appropriate mix and number of staff to meet the needs of the elderly in their care. Adequate numbers of and the 24 hour onsite availability of Registered Nurses has long been called for by medical and nursing bodies. Except for the recent introduction of mandated staff ratios in Queensland government facilities, there is currently no obligation on aged care providers to address chronic understaffing in their facilities. The lack of requirement for aged care providers to make assurances that their personal care attendants receive any training in care skills is also a huge concern. The lack of access to mental health care by elderly residents and the lack of adequate dementia management training have also been identified as problems.
Whilst we will have to wait until November 2020 for the findings of the Royal Commission, the Australian Medical Association (AMA) and the Australian Nursing and Midwifery Federation have recently launched a joint campaign calling for immediate action to address the crisis and suffering of the vulnerable elderly in aged care. The AMA has called “for a significant increase in Federal Government aged-care funding, matched with tighter regulations to ensure that providers do not siphon off the extra money to bolster their bottom lines.” The Nursing and Midwifery Foundation has also called for the government to require “aged-care providers to publish the staffing ratios in their facilities and to transparently report on their use of publicly funded subsidies”. As investors we strongly support this call.
In confirmation of Ethical Partners’ belief that businesses that are not properly protecting human rights will also suffer financially, the share prices of the three aged care stocks on the ASX have suffered over the recent period since the Royal Commission was announced. We also believe the negative sentiment over the sector will, rightly, persist for a period of time, and that with the likelihood of (much needed) increased regulation, increased staffing levels, and higher costs, there may be further impacts on their share prices.
Total Return of aged care stocks from 16 September 2018 when the Aged Care Royal Commission was announced to 21 October 2019 vs the broader market:
Japara Healthcare -23.6%
Estia Health -1.1%
Regis Healthcare -3.0%
S&P/ASX300 Accum +12.8%
Relevant industry bodies have recommended that the number of Registered Nurses and Enrolled Nurses both double from the average current staffing ratio. One aged care company CEO recently told a shareholder conference he also believes there will be increased regulations on staffing post the Royal Commission. This requirement for increased staffing will undoubtedly hit profit margins, but we fully believe it is the right thing to do ethically, as the Royal Commission has clearly portrayed.
As with the banking sector, trust and community reputation will also be an issue for aged care stocks for a long time, and we can only hope these providers address the Royal Commission findings fully and swiftly, in order to both address investors’ concerns, and far more importantly, to protect our vulnerable elderly.
During February 2022 the Fund returned 1.87% versus the S&P/ASX 300 Accumulation Index of 2.09%, underperforming the market by 0.21%. Over the past 12 months the Fund has returned 14.7%, outperforming its benchmark by 4.45% (after fees).