ESG: The Buzzword You Need to Know About
Updated: Sep 21
Last week, real estate giant JLL’s Hotels & Hospitality Group published a report on ESG and why it needs to be at the heart of hotel investment strategies, because of mounting pressure from investors, consumers, and government regulations––it’s good for people, the planet and now, more than ever, critical to the bottom line.
Let’s take a step back to the basics, what is ESG?
ESG stands for Environmental, Social, and Governance. Consulting group McKinsey defines it simply as:
The E in ESG, environmental criteria, includes the energy your company takes in and the waste it discharges, the resources it needs, and the consequences for living beings as a result. Not least, E encompasses carbon emissions and climate change. Every company uses energy and resources; every company affects, and is affected by, the environment.
S, social criteria, addresses the relationships your company has and the reputation it fosters with people and institutions in the communities where you do business. S includes labor relations and diversity and inclusion. Every company operates within a broader, diverse society.
G, governance, is the internal system of practices, controls, and procedures your company adopts in order to govern itself, make effective decisions, comply with the law, and meet the needs of external stakeholders. Every company, which is itself a legal creation, requires governance.
Source: Five Ways ESG Creates Value, McKinsey, November 14, 2019
Why are more companies and travel industry people talking about it now?
Although it may feel like everyone is suddenly talking about ESG, the movement actually started to pick up momentum in 2015, when The Paris Agreement was adopted by 196 nations with the overall goal to limit global warming to well below 2˚C, preferably 1.5˚C compared to pre-industrial levels. In the same year, 193 nations committed to the United Nations Sustainable Development Goals – 17 interlinked global goals designed to achieve a better and more sustainable future for all. “These two legislations have been a major driving force in pushing the sustainability agenda, cutting across governments and corporations while also influencing consumer behavior,” according to the JLL report.
How do hotels compare to other types of real estate and businesses in terms of ESG?
For the hotel sector to become more sustainable, JLL identifies 5-points that should be considered:
Source: ESG at the Heart of Hotel Strategies JLL, 2021
Regarding Environment, when compared to other types of real estate, hotels, particularly full-service hotels use more water, energy, and carbon emission intensities than any other commercial property type. The Sustainable Hospitality Alliance reports that hotels need to reduce carbon emissions by 66% per room by 2030 and by 90% per room by 2050. So, the struggle is real. The upside is that hotels stand to benefit from more sustainable and green operations and buildings, by potentially saving between 20% - 40% on utilities according to the 2019 ULI Hotel Sustainability Report.
As for Social, the JLL report stresses the importance of putting employees first and highlights that hospitality as an industry has particularly struggled post-pandemic, “Improving wages, training, and working conditions for lower-wage employees is top of mind across the industry and has always been a top priority. It is also important to note that supervisory positions are equally challenging to fill in the current environment.”
With respect to Governance, as stated by McKinsey, this is about setting the rules for how a company is managed, setting the right targets, and measuring what matters, to create the incentives to promote sustainable business. Diversity and inclusion is a major topic in governance for hotel companies as there is a real imbalance––almost 80% of the workforce in the sector is female whilst only 20% are in senior leadership positions. We’ve reported on the findings of the Castell Project, which has shown little progress in DEI within hospitality despite getting attention in the press. DEI is important for society and profitable business, a 2020 report by McKinsey which studied more than 1,000 large companies in 15 countries found that companies in the top quartile by gender diversity performed financially better by 25% compared to the bottom quartile, whilst the financial outperformance was 36% by ethnic diversity.
What are hotel companies doing to help push the ESG agenda forward?
Hotel companies have put policies and programs in place and hotel investors are making ESG a big part of their businesses which will influence how they invest moving forward.
"Future proofing hotels does not necessarily mean lower returns, in fact they may increase your bottom line through the efficiencies achieved and sharpen your valuation yield especially when compared to other non-sustainable investments," says Rekha Toora, Senior Vice President, EMEA Hotels Capital Markets at JLL.
The JLL report cites examples of what some of the largest global hotel companies are doing:
Launched in 2009, Hilton uses their own in-house system called LightStay to report on ESG. In April 2021, Hilton announced its commitment to cut emissions by 61% by 2030 in line with the Paris Agreement. In addition, steps have been taken to increase the sourcing of renewable energy at Hilton hotels around the world.
Marriott is also committed to reduce water intensity by 15%, carbon intensity by 30%, waste to landfill by 45%, food waste by 50% and achieve a minimum of 30% renewable electricity use by 2025.
Earlier in 2021, IHG Hotels & Resorts launched a program to tackle ESG goals. Named “Journey to Tomorrow” the series of commitments aims to make a positive difference to people, communities, and the planet over the next decade. IHG also launched “IHG Green Engage” which enables the hotel brand to set and track property-specific reduction goals for carbon, energy, water, and waste.
Out of the Radisson Hotel Group’s 1,500 hotels in operation and under development, over 450 have eco-labels. Compared to 2019, the group is targeting to reduce their carbon footprint and water consumption by 10% by 2022 and 30% by 2025.
Spanish hotel chain NH has committed in 2020 to sustainability with over 157 out of 361 hotels certified with GreenKey, the leading standard for excellence in the field of environmental responsibility and sustainable operation within tourism in 2020.
There are several hotel certifications that serve as a driving force to reduce operational carbon in hotels such as Green Key, Green Globe, and Earth Check. These certifications can help drive behavioral change, but at the end of the day, technology and automation will likely have a greater impact on consumption, according to JLL.
This is just the top line information, for more detail, check the JLL report ESG at the Heart of Hotel Strategies and another useful resource, not just for hotel employees and owners, but also for travelers is It Must Be Now, which goes into great detail on the best practices for sustainable travel.
Bottom line: with all these different systems for measurement, it is hard to know if what is being done by the industry is enough or on pace to meet the ESG challenges we face as a society.
“Investors are eager to invest in sustainable real estate with record levels of ESG funds being raised,” says Jessica Jahns, Director and Head of Hotels & Hospitality Research at JLL. “As a result, it is now more important than ever for hotel investors, owners, and operators to put ESG at the heart of their strategies”.