Making sustainability good business

For a long time it was widely held that the role of companies was to make money for their shareholders, with wider environmental and social issues having no place in the boardroom

This was most famously expressed by the economist Milton Friedman when he said: “The business of business is business.”

However, there is increasing recognition that businesses cannot be seen as separate from the environment and the society in which they are rooted. More than just its shareholders, business is about its stakeholders—its customers, its workforce, its suppliers and civil society.

Companies draw resources from nature—in the form of raw materials, energy, water, labour and other inputs—and the goods or services that they provide have an impact on the environment in both positive and negative ways.

And it is not just that business has an impact on the world around it the world around it has an impact on business, too. This creates risk for companies—to the supplies of the inputs they need to run their operations but also to their markets, their customers and their workforce.

However, it also allows companies to use sustainability as a way to differentiate themselves from their competitors. A recent report from the consultancy Interbrand found that corporate citizenship—the understanding people have of a company’s positive contribution to society—accounted for 13 per cent of the overall favourable impression of a brand and almost a tenth of what drove brand advocacy. It concluded:

The opportunity now can be summed up in a simple equation: Doing good, and doing it strategically, yields better brand value.

Global pressures

Sustainability has moved centre-stage for a variety of reasons. Recent developments in the global economy have created a more interconnected world where events in one part of the globe have implications elsewhere.

This was demonstrated in the run-up to the financial crisis—huge inflows of money from China allowed US banks to lend money to people with no prospects of paying it back, while at the same time the breakneck speed of China’s economic growth pushed oil prices to an all-time high of $147 a barrel. Both Chinese demand and the record oil price contributed to a sharp increase in food prices that led to food riots, the fall of governments and hundreds of thousands of deaths from hunger around the world. When the sub-prime mortgage bubble burst, the consequences were felt around the world and continue to reverberate today.

This increasing globalisation has coincided with other “megatrends” including rapid population growth in emerging markets, increased urbanisation, the limited availability of natural resources, and climate change, to create a new set of issues that business must confront.

Many investors have woken up to the fact that their returns are at risk if the businesses they invest in do not take account of these factors.

The rise of SRI

There has always been a niche market for socially responsible investment (SRI), which considers non-financial issues as well as straightforward business concerns. The first SRI investors were ethically driven—religious groups that did not want their investments to compromise their beliefs.

Such ethical investors can often influence the companies in which they invest in a way that far exceeds the size of their shareholding. An example is Christian Brothers Investment Services (CBIS), a US-based Catholic investment fund that has been writing to companies that it owns shares in, asking them to tackle sex tourism and human trafficking.

“As shareholders in several hotel chains, we began this summer to raise awareness of the role that the tourism and hospitality industries can play in fighting this crime,” says Julie Tanner, Assistant Director of SRI at CBIS. This is an issue that hotels may have thought was not their responsibility but they may now have to employ direct action. “Businesses of all kinds need to be aware that human trafficking poses serious risks to a company’s reputation and bottom line,” Tanner adds.

One tactic CBIS has adopted is to concentrate on high-profile sports events, such as the World Cup in South Africa in 2010 and the Super Bowl in the US, which are obviously a boon for the hotel trade but “lead to short-term increases in demand for prostitution and other forms of sexual exploitation”.

Often, ethical funds simply avoid investing in areas that they consider unacceptable, such as gambling, alcohol, pornography and armaments—something that does not always happen in mainstream funds. Such ethical stances create a perception that SRI's must sacrifice returns to remain true to their principles because they are limiting their possible investment universe. However, growing evidence suggests otherwise. The KLD 400 Social Index (KLD 400), the world’s first benchmark index to use environmental, social and governance (ESG) factors, has outperformed the S&P 500 since it was launched in 1990, for example.

Sustainability is good business

In fact, there are clear signs that failing to address ESG issues properly can hit a business’s bottom line—and therefore the return to investors. The most spectacular example was the wiping out of half of BP’s market value in the wake of the Deepwater Horizon explosion and oil spill and the ongoing damage to its operations and reputation.

A report for the United Nations’ Principles for Responsible Investment (UN PRI) says the world’s 3,000 biggest listed companies were responsible for more than $2 trillion of environmental damage in 2008 and warns that “as environmental damage and resource depletion increases, and governments start applying a more vigorous ‘polluter pays’ principle, the value of large portfolios will be affected through higher insurance premiums on companies, taxes, inflated input prices and the price tags for clean-ups.”

Michael Baldinger, chief executive of SAM, a Swiss investment fund that also administers the Dow Jones Sustainability Index, asserts that: “One of the key drivers for sustainability investing is that there is a proven positive relationship between corporate sustainability and financial performance.”

A report by Dutch bank Robeco and consultancy Booz & Company says that the SRI market will reach $26.5 trillion by 2015, more than 15% of total global investment. The biggest market by far is Europe, followed by the US. While the market is less well developed in Asia, SRI is beginning to gain traction there in the face of the region’s evident environmental and social challenges.

What is the impact on the hospitality industry?

The industry needs to understand that many investors believe that strong performance on corporate sustainability creates long-term shareholder value. “The quality of a company's strategy and management and its performance in dealing with opportunities and risks deriving from economic, environmental and social developments can be quantified and used to identify and select leading companies for investment purposes,” says SAM. As a result, “corporate sustainability performance is an investable concept”.

The Ethical Investment Research Service agrees: “Investors are increasingly giving greater weight to a company’s ESG performance when deciding whether to invest in that company.” The UN PRI adds that companies with good disclosure on ESG issues will find it easier and cheaper to raise capital.

The hospitality sector has to show that it is taking due regard of sustainability issues because of the financial implications for their investors. “Measurement and reporting of these aspects is becoming an integral part of an organisation’s strategy to differentiate itself from competitors as well as formalising the corporate approach to strategic cost-cutting and recognition of the environmental impact of the business activities,” says Debra Adams, managing director of Arena4Finance, which provides financial training for the hospitality sector and is developing a training course to help management understand the requirements for reporting on environmental impacts.

How to measure sustainability

While many hotels have CSR or SR policies, more of them need to show transparency and accountability by using effective corporate reporting channels to quantify, measure and track environmental and social performance. One of the most widely recognised mechanisms is the Global Reporting Initiative (GRI), a standardised approach to reporting that can be used to demonstrate an organisation’s commitment to sustainable development, compare performance over time, and measure performance with respect to laws, norms, standards and voluntary initiatives.

Spearheaded by Ceres, a network of the world’s largest institutional investors, leading Fortune 500 companies and environmental organisations, in partnership with the United Nations Environment Programme (UNEP), it has become the de facto international standard for corporate reporting on sustainability issues. Among those in the industry that report to GRI standards are Accor, InterContinental Hotels Group (IHG), Jumeirah, NH Hoteles, the Rezidor Hotel Group, Sol Melía and Marriott.

Marriott published its first official Sustainability Report, using the GRI guidelines, last October. “We are committed to being a corporate social responsibility leader, benchmarking with like-minded companies, and providing the information and transparency that our stakeholders increasingly expect,” says JW Marriott Jr, the group’s Chairman and CEO.

NH Hoteles, another company with a strong commitment to sustainability, agrees that transparency in accountability is key. “It is fundamental to achieving our business objectives, which are to satisfy the economic interest of our shareholders and guarantee the creation of wealth upon which we can create shared value,” says the hotel group.

The risk of more regulations is another reason hotel groups must embed sustainability in their operations, says Willem van der Zee, regional director for the Benelux region and France for the Rezidor Hotel Group. In recent years, the EU has introduced stricter environmental requirements on buildings, energy efficiency, renewable energy and recycling, to name a few – all of which have an impact on a hotel’s bottom line.

However, the group’s approach goes beyond simply a desire to comply with the rules. “We want to reduce our business risks and we use this approach to promote our brand. We have to stay ahead of customer demand,” van der Zee says.

Wise investments

Rezidor is among a growing number of companies that have taken a triple bottom line approach—people, planet, profit—to business. It is not a philosophy confined to Europe—the Indian hotel group ITC-Welcomgroup has been promoting sustainability and a triple bottom line for more than two decades, says Niranjan Khatri, general manager of the WelcomEnviron Initiatives at the group. “We knew the pressure would mount from investors and regulators to take these issues into account so we have been quietly working away. It is better to do it yourself than to have someone else tell you what to do.”

The group claims to be water positive and carbon positive while more than 30% of its energy comes from renewable sources. “And we are laughing all the way to the bank,” he adds. “The business case is obvious.”

Strong performance on sustainability may be proving good for business, but good disclosure will be key to attracting investors. That requires data comparability, accessibility and transparency. “Reporting has become ubiquitous in corporations, stakeholders begin to request reports, shareholders use reports as ancillary documents for evaluating managerial competence, companies see the value in the data behind reports, and investment groups evaluate companies’ sustainability ratings,” says Eric Ricaurte, principal of Greenview, which works to advance sustainable development in the hospitality industry by promoting sustainability reporting, measuring, and metrics. “Over time, we will see sustainability reporting become much more commonplace within our industry. Once in place, individual properties might even evaluate reporting as a strategic and cost-effective alternative to obtaining certification.”

By Mike Scott

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