ESG Sustainability – Environmental, Social and Governance -Criteria in Hospitality.

How can capital allocation transform the hospitality business for the better? Practical implications for Environmental, Social and Governance (ESGs) criteria in Hospitality.

Hospitality businesses implementing a sustainability strategy, starting their Environmental, Social, and Governance (ESG) non-financial reports should consider the advances of the European Financial Reporting Advisory Group EFRAG and European regulation.

Many companies have traditionally considered either doing the right thing or capturing opportunities and mitigating risks. 

“Companies tend to respond more to stakeholder demands than to social problems. Under this perspective, it is not hard to understand why smaller hotel companies’ primary motives to establish environmental practices involve cost reduction and efficiency, as this is the owners’ expectation”.

However, the enhanced reputation and innovation arising from being a force for positive change enable a company to detect business opportunities and mitigate boomerang risks.

Why is it relevant?
Rigorous sustainability assessment of organizations has become a critical competence in understanding their social and environmental impacts. Thus, sustainability due diligence is becoming a crucial competence in hospitality businesses. 

It extends beyond organizational financial risks, and it also requires assessing whether social and environmental impacts are consistent with its stated purpose, policies, and procedures.

This regulation will bring clarity and transparency when auditing sustainability reports based on the Corporate Sustainability Reporting Directive (CSRD), bringing qualitative, quantitative, and time-bound data with an inclusive approach.

On April 21, 2021, the European Commission adopted a legislative proposal including SMEs. Firstly, it will apply to all companies listed on regulated markets in the EU, except micro-businesses. Although listed SMEs will fall within the scope, they will have until January 1, 2026, to comply with the reporting requirements. EU members will transpose the upcoming directive into national law by December 31, 2022. As a result, companies that fall within the directive scope will have to comply with the amended rules for fiscal years starting from December 1, 2022 – January 2023. 

The EU Corporate Sustainability Reporting Directive (CSRD) will amend the existing Non-Financial Reporting Directive (NFRD). Companies will be required to report following mandatory EU sustainability reporting standards and provide external sustainability reporting assurance.

Disclose sustainability-related information about business models, strategy, and supply chains. The Working Paper (WP) presents the following criteria;

• ESRS 1: General provisions ESRS E1 Climate change ESRS S1 Workforce ESRS G1 Governance, risk management, and internal control.
• ESRS 2: Strategy & Business Model, ESRS E2 Pollution ESRS S2 Own workforce – working conditions ESRS G2 Products and services, management and quality of relationships with business partners
• ESRS 3: Governance and organization of sustainability ESRS E3 Water & marine resources ESRS S3 Own workforce – equal opportunities ESRS G3 Responsible business practices
• ESRS 4: Material Impacts, Sustainability Risks, and Opportunities
• ESRS 5: Definitions of policies, objectives, action plans, and resources
• ESRS 6: Financial Statements and management reports

The Directive contains conceptual peculiarities like the Dual Materiality of ESRG 1. On the one hand, financial materiality and, on the other, social and environmental materiality. In other words, how a company impacts its environment. The ESRG 2 requires information quality, and the ESRG 3 requires that reporting data be time-bounded. In addition, the ESRG 4 Limits and Reporting Levels and ESRG 5 ensure alignment at the international and EU levels. Lastly, the ESRG 6 is about connectivity. Companies must prepare their financial statements and management reports in XHTML format.

Other Areas of Impact 

BANKS
Whether hoteliers want to opt for a line of credit, renegotiate existing ones or contract financial products, banks will have requirements for clients regarding their ESG information.

INVESTORS
Whether hotels want to attract capital or participate in an investment group, ESG criteria are essential for decision-making when receiving investment. Asset management companies use ESG criteria as a filter for capital allocation.

INSURANCES
Accommodation risk management. Environmental, social, and corporate governance are criteria used by insurance companies. Thus, hotels could pay premium rates due to inadequate foresight and internal risk management.

TRANSPARENCY
This directive will make it possible to offer a more transparent process for companies when it comes to managing assets and sharing data with potential consumers, suppliers, employees, clients, investors, etc.

STANDARDIZATION
It will help implement the sustainability strategy more practically, set objectives, and report on progress.

For CFO..the ISSB!

The ISSB will focus on the material impact of sustainability factors on the future cash flows and the enterprise value of public companies. The ISSB will cooperate with the IASB to ensure compatibility between financial accounting and sustainability disclosures. 

Voluntary action does not appear to have resulted in large-scale improvement across sectors. Thus, this regulation will support the sustainability transition and the transparency of hospitality stakeholders. 

Maribel Esparcia Pérez
ESG Sustainability Expert
ABC Sustainable Luxury Hospitality