A strong commitment to environmental, social and governance (ESG) issues can be a powerful competitive advantage for hospitality companies, especially for those that can tell a compelling story about their ongoing ESG journey.
Consumers have told us they are eager to travel again after pandemic-induced lockdowns. In fact, we expect continued growth in hospitality with revenue generated per available room (RevPAR) approaching pre-pandemic levels in 2022.
However, the industry faces some challenges:
- Rising inflation, exacerbated by geopolitical concerns, could derail growth as consumers rethink spending on travel.
- Accommodation and food serviceshave experienced double the average quit rate of other sectors over the past two years.
- In the wake of the pandemic, returning guests are prioritizing safety and customer service while seeking meaningful experiences,whether that’s sustainable travel and tourism or authentic local flavors.
Step up investment
With leading hospitality companies already setting science-based and/or net zero targets, tracking and reducing carbon emissions — across energy use, transport, travel and operations — will become increasingly critical. Other ESG goals that can differentiate a business include natural resource protection, sustainable and local sourcing, zero waste and water conservation.
Stakeholders have broad expectations. More than 60% of consumers told us their ESG focus areas encompass data security and privacy; climate change; product safety and quality; worker health and safety; and racial, ethnic and gender diversity, equity and inclusion. They want businesses to step up investments in all these areas.
Evolving rules and standards are also underway, contributing to these fast-track ESG initiatives:
- In the US, the SEC has proposed new rules to enhance and standardize companies’ climate-related disclosures. The proposed disclosures are broadly aligned with frameworks such as the Task Force on Climate-Related Financial Disclosures (TCFD).
- The SEC has also proposed new cybersecurity rules to enhance and standardize those disclosures.
- In the European Union, US-based companies with entities there will likely have to comply with the European Commission’s Corporate Sustainability Reporting Directive (CSRD).
- At the COP26 conference, the formation of the International Sustainability Standards Board (ISSB) was announced. It is an important step toward developing consistent ESG reporting standards and strengthening capital markets.
Implement the right infrastructure
Companies should move quickly to implement the right infrastructure for ESG reporting. For the hospitality industry that may mean considering the role of ESG throughout the life cycle of hotel assets and disclosing information on ESG risks and opportunities that affect the value of a business.
This is particularly important for the hospitality industry’s fixed, long-term assets. Retrofitting buildings to make them energy-efficient, for example, is often more expensive than designing sustainable buildings during the development stage.
Companies are at various stages of tying the elements of ESG into their reporting and incorporating ESG into their broader strategy. But here are key questions to consider:
- Is your ESG strategy aligned with the objectives of your stakeholders?
- Are you taking clear, actionable steps to enable the operational shift ESG requires?
- Are you leveraging digital tools and automation to tech-enable your ESG initiatives?
- Do you have the data regulators will expect and how are you confirming that information you’re disclosing is consistent, accurate and complete?
Address stakeholder priorities
Regardless of how you responded to these questions, think about how your competitors might respond. Seek opportunities to differentiate yourself by addressing your stakeholders’ priorities.At PwC, we want to help companies accelerate their transition toward investor-grade reporting.
Workforce diversity, equity and inclusion (DEI) has emerged as a critical issue for hospitality companies,who are already facing high turnover rates. Hotels are rethinking how to engage and promote employees traditionally overrepresented in low-paying, low-skill jobs. Upskilling these employees and creating new pathways for advancement are ESG priorities directly tied to business strategy and performance.
As ESG reporting and regulatory guidance evolve, companies that progress faster will not only be better positioned to react,they will also be likely to gain a competitive advantage by being at the forefront of the issue.
Examples of ESG metrics for the hospitality industry include:
- Climate change mitigation: Scope 1 and Scope 2 greenhouse gas (GHG) emissions.
- Climate change adaptation: Number of lodging facilities located in 100-year flood zones.
- Diversity and inclusion: Percentage of gender and racial/ethnicdiversity at executive levels and in middle management.
- Labor practices: Voluntary and involuntary turnover rate for lodging facility employees.
- Water management: Total water consumed in regions with high or extremely high baseline water stress.
- Governance: Description of board oversight of ESG issues.
ESG reporting challenges for hospitality companies
- Evolving global reporting expectations
- Lack of infrastructure to meet investor-grade reporting
- Understanding and reporting both ‘inside out’ and ‘outside in’ ESG impacts
Evolving global reporting expectations
Companies are at different stages of tying the elements of ESG into their reporting and incorporating ESG into their broader strategy. Moreover, not everyone uses the same standards and frameworks. With the growing sets of regulations around the world, there is hope for convergence between the different frameworks in existence.
However, one of the challenges with ESG reporting is that it’s a multi-stakeholder endeavor, and stakeholders may have different needs and expectations. As companies continue on their ESG reporting journey, it is important to understand key stakeholder needs and develop a strategy to appropriately address them.
With limited external guidance so far, leading companies are working on turning their existing social goals towards impact-oriented goals. Some in the hospitality industry are coalescing around human rights issues, as hotels can be sites for humantrafficking. Efforts include embedding human rights due diligence across global operations and in the supply chain, training staff and supporting survivors.
Lack of infrastructure to meet investor-grade reporting
Once a company decides what ESG information to report on, and through which communication channel, it then needs to contend with the challenges of how to effectively collect, analyze and report the information.
The breadth of ESG data creates significant reporting complexity. When referring to GHG emissions, Scope 3 GHG emissions (emissions resulting from activities from assets not owned or controlled by the reporting organization, but that the organization indirectly impacts in its value chain) in particular are creating challenges for companies, given the high degree of reliance on information provided by external parties and still-fluid calculation methodologies.
The good news: Hospitality companies are already reporting more ESG information than they were five years ago. They are developing an ESG strategy and allocating resources to ESG-focused initiatives.
Understanding and reporting both ‘inside out’ and ‘outside in’ ESG impacts
What should you include in your ESG report? The identification of what’s material in ESG may be different from financial statement materiality, as the various standards and frameworks have different concepts of materiality.
It involves more judgment by management, who may consider input from various stakeholders, such as board members, customers and employees. The Corporate Sustainability Reporting Directive (CSRD)-proposed rule, for example, is built on a “double-materiality” concept, meaning that companies need to assess and report on not only their own impact on people and the environment, but also about how sustainability issues can affect their business.
Four ways to move toward investor-grade ESG reporting
Applying ESG standards and frameworks as well as developing metrics and controls over reporting will often involve many different areas of a company’s operations. It will likely take time to develop the appropriate systems and processes. We suggest starting with a narrow set of priorities:
- Decide on your ESG strategy and metrics.
- Define process and governance steps to have confidence in your reporting.
- Design your reporting architecture and technology.
- Tell an authentic and cohesive story.
The hospitality industry is rethinking customer engagement and incorporating social and environmental activities within its services, from community service to immersive experiences in local culture and arts. In the hospitality industry, retaining and advancing a diverse workforce,protecting the health and safety of employees and guests, and maintaining data privacy and security are some other top ESG issues.
Companies that tell a clear, credible ESG story will not only establish themselves as leaders in the market but also stand to benefit from increased access to capital and the returns associated with that access.
In the longer term, as data and reporting become more regulated and standardized, objective comparisons will become easier. By stepping into the spotlight now with a compelling ESG story, you can take strategic actions in a measured way and start to build momentum to differentiate your company.