Complex intangibles cannot be reduced to simple quantitative metrics.
ESG factors cannot be easily measured, and reducing them to quantitative metrics is unfeasible.
Context
The tourism ecosystem is subject to unprecedented conditions evolving quickly and affecting its traditional systems and models. Economic uncertainty and environmental and social concerns have left a deep dent in today's business landscape, affecting travelers and hospitality businesses alike.
Further development of labor skills, education, and business flexibility can contribute to running more resilient and sustainable hotel operations. Innovative hospitality services are essential to meeting evolving types of demand while respecting the long-term needs of local communities and nature.
When it comes to ESG professionals, the competence greenwashing is an example of actors using non-experts to develop business strategies for the topic. Despite the emergence of the sustainable finance sector and ESG investment markets to direct funds to green growth, a disconnect between ESG competence claims and corporate ESG data is apparent.
There is unprecedented risk in the global economy. Financial risks such as supply shocks and inflation (the high inflation rates could adversely affect the midscale and economy hotel markets, and potentially lead to a drop in sales), geopolitical threats, and environmental, health, and technological threats due to innovation are materializing today. Furthermore, societies face wealth inequality and the return to protectionism and fragmentation.
Law & Frameworks
Regulations and sustainability frameworks are also evolving quickly. Whether it is in Europe with the Corporate Sustainability Reporting Directive at the EU level - for instance, the fact that the EU may ban hotel toiletries and single-use items in its fight against waste as part of the European Green Deal to promote a circular economy - or the recently published emissions requirements of the ISSB.
The European Commission response to the Inflation Reduction Act called the "Green Deal Industrial Plan" (https://lnkd.in/dpaAWdrA) and a so called "Temporary Crisis Transition Framework" (https://lnkd.in/dXqevBhY)
The #UK Financial Reporting Council (FRC) has issued a statement of intent on #ESG reporting announcing further work on developing guidance on the distribution and use of ESG data, improving materiality assessments, as well as developing common standards for sector-specific climate transition plans https://lnkd.in/dJh-F7EG
European Insurance and Occupational Pensions Authority (EIOPA) https://lnkd.in/d4E6C-_J
UK's Competition and Markets Authority https://lnkd.in/dZ_7nXX7
Lawsuits against companies concerning ESG issues increased by 25% between 1984 and 2014 according to the World Council for Sustainable Development.
Biodiversity
Biodiversity conservation is at the top of the agenda for 2023. A historic agreement was reached at the 15th UN Biodiversity Conference (COP15).The agreed Global Biodiversity Framework (GBF) is intended to safeguard the world’s land, inland waters, coastal areas, and oceans by 2030 and sets additional targets, disclosure rules, and reform of harmful subsidies. The agreement includes that by 2030, nations will protect 30% of the earth's lands, oceans, coastal areas, and inland waters. In addition, they plan to reduce harmful government subsidies by $500 billion annually and cut food waste in half. This last one is especially significant for the hospitality industry. As part of their sustainability agenda, hotels and restaurants plan to reduce food waste and promote conscious consumption.
Despite the agreement to protect ecosystems, the fundamental reasons why biodiversity is decreasing and structural problems are not adequately addressed. It is critical not to rely on carbon offsets, biodiversity credits, no net loss, and other similar partial solutions.
There is a need to understand the business context and accept ecological limits to operations and growth. Hospitality brands will have to monitor, assess, and understand their nature dependencies, and impacts on biodiversity through their hotel operations, value chains, supply chains, and branded portfolios. In other words, indigenous and local communities must regain land management rights to stop and reverse biodiversity loss.
Mega Threats
Fragmentation, division of the global economy, protectionism in trade, and revolutions brought about by AI, automation, robotics, and machine learning are some of the current mega threats. Investing in decarbonization of assets and supply chains at the speed needed to increase renewable energy production and the infrastructure needed around it is also challenging.
ESG
For the hospitality investor community, environmental, social, and governance (ESGs) is becoming increasingly relevant. It can also be challenging for companies and their boards to prioritize and achieve operational sustainability outcomes and define industry-specific materiality areas.
Investors are closely focused on sustainability. The ESG backlash seen in the past months has been because ESG is more rhetoric than factual in many reports, data, and funds.
The expansion of the corporate governance and engagement agenda to more proactively include environmental and social topics coincided with policy shifts that create both incentives and penalties for certain sustainability behaviors. ESG will continue to evolve as regulatory bodies such as the FCA attempt to clarify disclosure expectations targeting misleading information and bring transparency to ESG analysis, management and reporting. In the US, several SEC rules, including those governing climate disclosures and attempts to restrain greenwashing, keep shaping ESG's future. Investing in stranded assets in commercial real estate is especially risky for the hospitality sector. Climate-related risks will affect assets (e.g., sea level rise or extreme weather events). Thus, investors are and will be looking for assets that are protected.
Digitalization & Talent
Lastly, how brands will adapt to meet the demand of a hyper-digitalization of societies and consumers in the coming years. Internally, to innovate and drive brands and companies to the forefront, investing in technology and training teams in every department will be essential.
Digitalization and green transitions in the tourism ecosystem should be about collaboration and support between stakeholders across sectors and public and private actors at all levels. To achieve a meaningful advance in sustainability and to ensure operations are run smoothly throughout the year, the industry may see improved terms of employment. This is because companies continue to compete to attract and retain top talent.
Understanding the importance of context-based sustainability.
Sustainability is the ability for impacts (positive or negative) to persist in perpetuity; so while impacts are facts, the sustainability of those impacts requires interpretative contextualization. - r3.0
Rethinking Systems
Both physical systems (infrastructure and technology) and social ones (markets and governments) must be rethought when it comes to how hospitality provisioning systems link resource consumption with social outcomes.
Before we get into it, remember that
CO2/GHG emissions reduction plans are not ESGs
That ESG, sustainability and regeneration are not the same concepts
That narrow focus on ESG analysis might lead to lack of context and thus unseen risks and opportunities to impact positively.
1. Asset Strategy Intention
Is the asset development intention to preserve capital, track a market index, maximize short or long term risk or protect natural resources and human capital rights?
2. Resilience Assets
In the event of different environmental climate and transitional risk-related events, will the strategy be able to achieve its objectives? Will the asset remain financially and operationally resilient through disruptions from technology-related advancements?
3. Risks and opportunities
How are potential risks and opportunities being recognized and addressed?
Who are the relevant parties involved in each issue?
Are the financial impacts of material issues, including environmental, social, and governance (E, S, and G) factorswell understood?
- Stakeholders
Who are the stakeholders in each issue, and what are their concerns?
How are these concerns being addressed?
- Financial impacts:
Are the financial impacts of material issues, including tangible and intangible factors, being taken into account for each investment?
4. Strategy and Outcomes
Are the investments in line with the objectives and goals of the strategy?
Is the strategy meeting its intended outcomes?
What are the positive and negative externalities created by each investment?
ESG is no more or less special than other intangible assets that drive long-term value and create positive externalities for wider society.
What is key is to consider the local context.
My inspiration for writing “The end of ESG” was an article by the Nobel prize-winning economist Richard Thaler who wrote a paper called “The end of behavioral finance.” By that, he meant behavioral finance should no longer be seen as niche and that we need to understand psychology, not just cashflows and discount rates, to fully understand asset classes. Similarly, I’m saying ESG doesn’t need a specialized term, as that implies it’s niche, rather than it being something so critical to the long-term value of a company that any fund manager or executive, regardless of whether they have ESG in their job title, should be taking it extremely seriously. - Alex Edmans
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