The risks affecting the hospitality industry are not only related to inflation, war, and geopolitics. Science has proven that climate-related risks and biodiversity loss are a threat.
The hospitality industry operates in a volatile, uncertain, complex, and ambiguous environment. With constant unpredictable change being the norm in many industries, it is difficult to predict and prepare for the future and presents challenges for hotel owners and leadership teams. Can a sector that relies on the land, local biodiversity, and social stability to operate help destinations and communities thrive and be more resilient?
Understanding that we need to rethink current economic operating systems, how can hotels change from a traditional ‘take-make-waste’ model to a systemic redesign? Society, regulators, guests, and investors are driving a change in the economy.
What risks are threatening hotel assets?
1. Physical risks
Climate-related risks such as extreme weather events (floods, wildfires, sea level rise, water stress, heat waves, and cyclones) can jeopardize the built environment activity. Buildings, such as hotels and resorts, must prepare to decarbonize assets and make equitable transitions that preserve nature and ecosystems.
Hotels and asset managers implement software and deep technologies at the property or portfolio level to measure and manage risks based on IPCC models and scientific
data. Although the challenge is the consistency and reliability of data among technology providers, hotels can prepare SOPs and internal processes to gather data requested by different business stakeholders. And thus, they will be resilient as a result, protecting nature and local communities.
2. Transitional Risks
Transitional risks include policy changes such as upcoming regulations, reputational impacts, and technological advancements that can be perceived as innovative and present new business opportunities. Those risks and opportunities are societal and economic shifts intended to achieve a low-carbon and nature-based future.
European Regulation The Commission adopted, in April 2021, a proposal for a Corporate Sustainability Reporting Directive (CSRD) which would amend the existing reporting requirements of The Non-Financial Reporting Directive (NFRD).
The directive extends the scope to all large companies and all companies listed on regulated markets but leaves out the scope listed as micro-enterprises. As a result, audited information must be tagged digitally and companies must report following mandatory sustainability reporting standards. The draft standards are developed by the European Financial Reporting Advisory Group (EFRAG). You can read the drafts shared for consultation here.
It is an opportunity to harmonize the current reporting standards landscape, simplifying reporting for hospitality companies. It will also prevent overlapping standards and the inconsistency of data requirements from stakeholder groups.
What companies are obligated to disclose information required under the ESRS of the CSRD regulation?
All listed companies and large companies that exceed 2/3 of the following: Balance sheet total: > EUR 20M, Net revenue: > EUR 40M, and > 250 average number of employees. The directive aims to build on and contribute to existing international sustainability reporting frameworks and initiatives.
“The reporting frameworks and standards of the Global Reporting Initiative (GRI), the Climate Disclosure Standards Board (CDSB) (now consolidated into the ISSB) the Sustainability Accounting Standards Board (SASB), the International Integrated Reporting Council (IIRC) and the UN Guiding Principles Reporting Framework are reflected, as relevant, in the [draft] Standard”. EFRAG
“Double Materiality” (DM) is a newly introduced concept introduced in this legislation. DM “ is a concept which provides criteria for the determination of whether a sustainability matter has to be included in the undertaking’s sustainability report”.
In this way, the double materiality approach can find the links between company impact materiality areas and business financial materiality areas.
Hospitality and Small and Medium Enterprises (SMEs)
SMEs will require time to learn about the CSRD requirements, prioritize CAPEX, and source investment for transition costs. Furthermore, they need to educate the workforce and develop the necessary data collection processes and internal systems.
Also, technology implementation will require time. The main challenge for SMEs is that large companies can potentially cancel contracts with them if they cannot report and/or do not have sustainability practices and data.
SMEs will not reach the main objective of legislation put forward by the Commission by reducing the number of information requests to companies. As part of the value chain of big companies, SMEs will have to present multiple sectoral reports.
How to start preparing
It will be mandatory to report sustainability indicators under the Corporate Sustainability Reporting Directive, but hospitality companies have to start preparing now to comply with the upcoming requirements.
Hotel owners, operators, and management companies can start to gather the information needed for reporting purposes from business partners and stakeholders (such as suppliers, clients, and investee companies) by harnessing cooperation along their supply chains.
What’s more, hospitality companies need to start implementing internal processes and structures to ensure the business model complies with the legislation. It will ensure transparency in sustainability and environmental, social, and governance practices, gather data, put metrics and systems in place, and ensure that the data is well-managed and updated.
There must be a medium where hospitality companies can collect and store information in an XHTML format. This way, the company information will be fed into the European Single Access Point using a digital tag.
It is vital to follow legislative procedures and to ensure that changes are made through the European Financial Reporting Advisory Group, EU Taxonomy Delegated Acts, and the transposition of the directive in EU member states. Until the final reporting framework is available for large firms and in 2026 for SMEs, it is fundamental to ensure the traceability of supply chains.
In hotel operations, sustainability is expected. How does the sector go above and beyond?
Guests and consumers expect human rights compliance and nature protection from hotel companies. As such, an old approach to sustainability is unhelpful for business, nature conservation, and community well-being.
As part of the waste reduction strategy, a simple plastic reduction plan or metric could be a “sustainable practice.” However, to ensure resilience in hotels and hotel groups, a systemic change approach is needed. As a result, we should be thinking about how we can incorporate circularity before engaging with suppliers, ensuring our purchases from bio-based, locally-sourced suppliers, and the plastic alternatives we provide in every hotel department support and benefit local communities and the environment. It is not easy, but it is the way to move forward if we want to thrive.
Hospitality Investment Management
Investors can use capital to solve problems caused by ineffective systems. With less focus on basic sustainability practices and more proactive action-focused systems thinking. We can find exemplary cases of social impact investing in residential and commercial real estate businesses.
Asset management firms can maximize capital allocation to improve hotels in surrounding areas and foster local prosperity. Do not focus only on doing less harm (DNSH) but rather on creating positive effects in every investment lifecycle. As investors have called for more transparent and harmonized sustainability data in recent years, advisors, frameworks, technologies, NGOs, and regulators have
fostered collaboration to improve ESG-related data requirements and clarity around the topic. In addition to the CSRD regulation, the concept of Double Materiality will lead to enhanced clarity on the link between the company’s environmental and social impacts and its financial performance.
As regulators in major markets are introducing a rising number of mandatory reporting requirements, combined with existing legislation, these rules have intensified ESG-related litigation risk for reporting entities, but the lack of standardization and reporting frameworks and institutions, as well as the lack of industry-specific clarifications, can be difficult to navigate by the industry. Thus, the focus must be on integrating sustainability into the business model holistically to improve company performance and positive impacts.
Can the use of technology help?
The challenges around data and different outcomes from different software providers in climate physical risks make it difficult for asset managers to make informed decisions.
The use of technology is in its early days. Thus, it will take time to see how machine learning technology and deep tech can support transparency and enhance decision-making and reporting.
Hotels have a substantial impact on land, nature, and communities. Thus, there is a growth potential to use companies to address global challenges, such as biodiversity loss and growing inequalities, in a proactive manner to redesign systems and focus on wellbeing.
Furthermore, including sustainability and regenerative practices in decision-making is now a must-do. Investors and corporate clients expect information and action. In a shortage of staff scenario, where many professionals have left the industry due to the
lack of purpose and labor conditions, it is clear that younger generations will work for brands if there is an alignment of goals and values.
Maribel Esparcia Pérez
ESG Sustainability Expert
ABC Sustainable Luxury Hospitality
Proudly Ambassador Global Wellness Institute
Happiest Places to Work – Awards