Green regulation will require audited accounting from next year

Regulators are moving to make non-financial business compliance as important as financial reporting, a leading ESG expert has said.

Speaking recently at the Resort and Residential Hospitality Forum in Portugal, Ufi Ibrahim, CEO at the Energy & Environment Alliance, warned that change was coming.

“In fact, this current period has been likened to the period just after the Wall Street crash, when they created the rules that govern business, with the accounting processes we have now,” she said. “The regulators have created rules that will come into force from 1 January 2024, and will need to be reflected in company reporting from 1 January 2025, which will mean that companies will have to report non-financial information, which will need to be audited just like financial accounts.”

This was part of stamping out greenwashing, she explained and also means that it is vital for the hospitality industry to come together “not as a corporate project but in ways in which we can profit from ESG”, she said. “What is the impact on your business, on the bottom line, on risk? What are the prospects, where ESG carries as much clout as financial performance?”

Investor and insurer attitude

One of the other major drivers of change was investor and insurers and their attitude to risk, with the environment and climate playing an increasingly important element in this assessment.

“Stranded asset risk is something I am hearing increasingly from the investor perspective, and they are looking at this risk before they make decisions. These are key metrics, including energy performance. This is what capital providers are starting to use and it is going to influence the valuation of assets,” Ibrahim stressed.

She also pointed out that physical environmental risk awareness is very limited within the hospitality industry, but needed to be considered much more carefully, given the growing impact of environmental events.

“I think it will hit everyone like an avalanche,” she warned. “We’re least prepared to deal with it, but it will become increasingly impactful because insurers won’t want to insure high risk properties any longer because of forest fire risk, rising sea levels or environmental issues. Ultimately it will come to haunt us all pretty quickly, especially where resorts are often located. I don’t think our industry is factoring the risks very well at the moment.”

Management to prevent stranded assets

Ramon Tomas Ranz, principal and head of asset management, Pygmalion Capital. Agreed and said that he believed the investors his company was working with are generally becoming much more attuned to the financial imperative to ensure that their investments are sustainable.

The company asset manages 11 hotels and although Ranz conceded that there are still those investors within the industry who are not focused on ESG but only on the bottom line, there are others who have really embraced ESG.

“Probably the E is the easiest to track and measure, with very quantifiable aspects, which means that we can check how we are performing against comparable assets,” he said. “Certification is also important and it means you can see if your asset is better than your neighbour. These are the types of metrics we are looking at.”

He said that the company is also actively asset managing to avoid future so-called brown discounting, where valuations are lowered because of poor energy or sustainability performance.

“We are actively working on more efficiency because of this, for example getting rid of most natural gas other than in the kitchens. It’s not always easy but it’s an ongoing conversation and the investors are active as well,” he added. “Our investors are giving up dividends to invest in the properties to be more sustainable, and our guests are becoming increasingly appreciative about people who can deliver on sustainability. Small examples such as not changing towels every day show greater awareness.”

Penalties versus incentives

While he felt that the industry was still some way down the line from companies paying a premium for sustainable assets, he felt instead that stranded assets could be penalised in terms of valuation and liquidity, which will incentivise sustainable asset management.

Xander Bueno De Mesquita, Founder and CEO of Treating Life Well and the innovator behind the QO Amsterdam Hotel, said that he had a vision in terms of how he had wanted to approach sustainability there and became convinced that the hotels and wellness industries “are the industries to make the change, because they are about people and not stuff.”

De Mesquita added that nowadays certification is useful but said he was convinced that “you need to figure it out yourself with your green team and then what you do will align with one of the certifiers.”

Turning to circularity and the circular economy, he said that the effectiveness also depends on scale, with the larger the scale the easier implementation.

“Often it about different thinking, not necessarily more expensive,” he said. “I’m excited about the energy of the younger generation in our companies, mostly women, with purpose and a lot of knowledge on how to try and tackle the crisis.”

Ibrahim added that in Europe it was possible that change may be driven by penalties, whereas in the US it was more likely to be achieved through incentives.

“Local governments have to report into Central Government about their own performance and they will want local business numbers in order to report up,” she said. “So local government may be the ones to push for more incentives to meet their own targets and that’s where I think it is sensible to focus your lobbying efforts.”

All those quoted in the article appeared on stage at the Resort & Residential (R&R) Hospitality Forum held in Lisbon between October 9 and 11, in a session called: ESG Strategies For The Bottom Line