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ESG: Impact for the Tourism Sector

Esg Stock photos by Vecteezy

If you work in risk management or the investment sector, the ESG, or environmental, social and governance, is familiar; but, the concept has been around for a long time, even before ESG was first mentioned by the UN Global Compact in 2004. 

In the 1970s and 1980s, it was rooted in SRI – socially responsible investing. By the early 1990s, it had evolved into CSR, corporate social responsibility, and largely focused on human rights and supply chain ethics. 

What we refer to now as ESG principles rapidly took hold in the investment sector by the end of the 20th century and was articulated in John Elkington’s 1998 book, Cannibals with Forks, the Triple Bottom Line of 21st Century Business. The triple bottom line, as we know, is a sustainability framework focusing on people, planet and profit. These non-financial considerations soon became components of company valuations and investment decisions, something not lost on corporations.

Essentially, ESG refers to a set of metrics used to measure an organization’s environmental and social impact and has become increasingly important in investment decision-making over the years. 

So, what components do investors measure compliance with ESG principles?

Within the “E” component, there is a focus on a company’s or organisation’s environmental impact. The criteria include, but are not limited to, evaluating greenhouse gas emissions, waste management, energy usage, and sustainability efforts. In that regard, ESG compliance reports are expected by many investors (and their risk management departments) from the company or organisation showing their compliance with or progress in reducing harmful chemicals, reducing their carbon footprint and promoting renewable energy.

The “S”, or social component, involves a company’s relationships with stakeholders and the community. For example, criteria normally include fair wages, ethical supply chains, diversity and safety, all of which must be addressed through concrete, measurable actions.

Finally, there is the “G”. Governance means that the company or organisation are accountable and transparent and that the leadership is ethical.  In this case, governance mechanisms, shareholder rights and management are measured to assess compliance with ESG compliance.

ESG principles can also be applied to local and national governments, subject to the specific context and priorities. The environmental component includes laws and regulations addressing those issues, like the European Green Deal and European Climate Law. Similarly, the social component includes regulations which are focused on fair wages, ethical supply chains, workplace safety and diversity. Finally, governance looks to laws and overall policy to ensure accountability, transparency and ethical leadership, such as the Shareholder Rights Directive in the EU. 

What does any of this have to do with tourism? ESG is not just for companies and their investors any more – the entire travel sector value chain and government regulatory bodies need to pay attention.

In the context of ESG private sector tourism providers have a major role to play in implementing the criteria. In doing so, they help to ensure sustainable practices and responsible operations. How?

By applying ESG criteria, the public and private sectors impact the industry in several ways. For example, the private sector tourism provider can adopt initiatives to preserve the environment, including minimizing carbon emissions, conserving natural resources, and implementing waste reduction and energy efficiency practices to improve sustainability. These same private sector players can prioritize social responsibility through fair labour practices, supporting livelihoods in local communities and ensuring diversity and inclusion.  From a governance standpoint, tourism providers can strengthen their practices to ensure that policies and procedures are transparent, support accountability and ethical practices are followed.  Governance, of course, requires clear structures, regulatory compliance and responsible decision-making processes, all of which means that business processes, roles and responsibilities are clearly defined and implemented. 

Government legislation can support the implementation of ESG by private sector tourism providers, particularly through the regulation of sustainable approaches and responsible business practices. At the same time, reputational enhancement for tourism providers will attract environmentally and socially conscious travelers – who have already made clear that they not only use environmental and social criteria to select destinations and providers but are willing to pay more.

For the tourism sector, compliance with ESG criteria will increase competition, and customer loyalty and contribute to a positive brand perception.

Governments, for their part, can provide incentives, grants or regulatory support to those tourism providers that can demonstrate their ESG performance. The same providers can leverage their performance to attract investment.

Of course, there are impediments to ESG implementation. At the top of the list is the lack of standardization for ESG reporting and disclosure practices, thus making it difficult to compare and assess performance and raising concerns about 'greenwashing' to attract investors and customers. Impediments and challenges are the subject of a more comprehensive article, however.

This brief article only touches the surface of ESG criteria and their application. But, in a sector that constitutes more than 10% of global GDP, the tourism industry needs to pay attention to ESG. 

ESG regulations and reporting requirements will only become more stringent and widespread. Implementing ESG practices can help comply with these regulations, avoiding penalties and reputational damage, and will help the sector become more resilient in the face of climate change, resource scarcity and changing customer expectations.

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