As sustainability becomes mainstream, it is time to prepare yourself for a new set of acronyms. ESG, as you will find, is really the tip of the iceberg in a new era of sustainability that leans heavily toward metrics and performance, data and analysis, and is weaved into business at new levels.
What is ESG?
ESG is a collective of non-financial information that is frequently related to sustainability and is addressed at the organizational level (not the property level or the country level).Terms that fall under the ESG include: carbon footprints, building and product certifications, local and organic foods, human rights screening, stakeholder engagement, corporate board governance and accountability for environmental and social risks, and top-level strategy for addressing climate change. There is, however, one twist to ESG that you generally won’t find in other assessments and frameworks for corporate responsibility and sustainability: ties to financial metrics.
How all of the above relate, quantifiably, to the bottom line, is a key driver for the user of the ESG information (and term). Metrics such as carbon emissions per earnings before interest, taxes, depreciation and amortization, or corporate contributions per employee can be found in this discussion. Another aspect of this type of measurement that results is the element of ESG and how it relates to risk. Climate risks, energy risks, risks to water availability, etc., all fit into this methodical approach and find their place in the analysis of investments.
ESG Advantages
ESG has several advantages. The same way that environmentalists don’t like talking about return on investment, the word sustainability is now ubiquitously used and commonly misused that professionals in the financial world don’t want to sound like environmentalists or speak in terms that may be debatable or complex. Let’s face it, it is easier to speak to specific terms than overarching ones, and ESG satisfies that need while at the same time offering more color to the world of financial acronyms. And the acronyms are being used with dollar metrics. According to the U.S. Social Investment Fund, $80.9 billion in investor capital was invested in 375 alternative investment funds that incorporate ESG data, representing a 15.9% increase from 2010. More than half of this capital is managed by property and real-estate funds.
Though some leading organizations paved the way with proactive reporting, the current trend is just responding to requests for information. This includes requests for standardized questionnaires such as the Carbon Disclosure Project or the Global Reporting Initiative, as well as individualized or specialty questionnaires such as GS Sustain from Goldman Sachs. And though not as common for lenders, it is likely that once banks start adding types of sustainability criteria to their analysis, they will use the term ESG, as well.
Asking the right information
To understand what information is asked, I offer that it includes a mix of policies, practices and performance data. For example, asking whether there is a policy of screening investments or operations for certain environmental and social issues, a practice of reporting to specific frameworks or measuring your energy consumption, and the disclosing of performance data to demonstrate improvement. On the environmental side, the usual suspects of energy, water, waste and carbon are commonly found in evaluating environmental information.
In the hotel world, owners of hotel real estate are likely to encounter this term more frequently. Hotel real-estate investment trusts are already being asked for this type of ESG information from investors and investment management firms. This trend will only continue, along with more specific guidance on ESG metrics for real estate. Here are a few examples of how this is evolving:
• The United Nations Principles for Responsible Investment is drafting an Investor Reporting Framework. The first public comment period on these drafts was held last year. This includes a framework specifically for the ESG information to look at and report when making investments in REITs.
• Through the UNEP Finance Initiative another term and potentially new acronym has emerged: Responsible Property Investing. This is a concept by which environmental and social issues are taken into consideration when investing in properties, in addition to the obvious financial considerations. This involves considerations at all stages of the life cycle: developing or acquiring (green buildings), refurbishing (efficiency upgrades), managing (e.g. energy and water management programs) and demolishing (e.g. recovery and re-use of materials).
• Other initiatives related to buildings are out there and will fall into the meld of being incorporated into ESG for properties. These include the UNEP Green Building Working Group, the UNEP Sustainable Buildings and Climate Initiative (which last year launched the CCM or Common Carbon Metric for calculating the carbon footprints of buildings).
• The Global Reporting Initiative just launched a taxonomy and road test for classifying the disclosures and performance indicators found in GRI reports that aligns with extensible business reporting language. Here, the moment of the corporate controller or CFO and the sustainability professional sitting down together to commonly understand the uses and the relationship of GRI and XBRL taxonomy, is telling of where we’re headed.
• Integrated Reporting. Stay tuned…
Though overwhelming, much of this translates back to the key environmental and social issues hotels address to reduce costs, increase guest preference and create long-term value. This year it equates to getting your data in order, setting up the procedures for continual reporting and beginning to analyze the data together with your stakeholders. Then we’ll see what other acronyms emerge in the coming years.
Eric Ricaurte works with the hotel industry and its leading companies to advance sustainability through reporting and measurement. His current activities include consulting, industry engagement, academic fellowship, column writing and publication authoring.
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