Sustainable tourism: 10 key issues investors should consider

El Nido – classic

Writing in the Guardian, Isabelle Cable of Candrian outlines the benefits and challenges of investment in sustainable tourism

A socially responsible investment (SRI) investor is constantly balancing the potential profitability of an organisation against how sustainable and responsible its business model is. When it comes to the tourism sector, this makes for a complex investment strategy.

The tourism sector is heterogeneous and segmented, encompassing catering, hotels and resorts, and travel services. However, there are common issues that affect the whole sector. Trends such as climate change, resource depletion and health and wellness, have an impact on a companies’ attractiveness.

Here are the key issues an SRI investor into the tourism sector should consider:

1. Carbon and other emissions

Although the tourism sector may not be one of the major greenhouse gas contributors, the development of international travel and an increase in air traffic has contributed to its carbon footprint.

An increasing regulatory burden may affect companies’ future profitability, while the elimination – and eventually recycling of – restaurant grease and efforts to limit cruise ship exhausts illustrate other operational concerns that must be noted.

2. Energy consumption and water waste

The tourism sector tends to have high energy consumption levels, particularly at hotels. A strong positive correlation is usually observed between a hotel’s star rating and the energy consumption per room. While heating and cooling remain the main source of consumption, luxury services such as a heated pool, spa, golf or laundry services all increase energy bills.

Extra amenities, combined with changes in consumer patterns, mean new hotels consume twice as much energy as the average hotel built in the 70s. Similar trends are observed in tap water consumption levels.

As a consequence, an SRI investor should better value hotels of a lower standard (such as those in the budget or economy category), having implemented measures to monitor their energy and water consumption.

3. Job creation and contribution to local economy

The leisure industry is a major source of income for many emerging and developed countries. A recent report by The World Travel Organisation found tourism represented more than 9% of global GDP.

The quality of a company’s ties to local communities should also be under SRI investors’ scope. The stability of partnerships with local authorities is often a key competition factor.

4. Working conditions

While the tourism industry might be a significant source of employment, it can also be synonymous with tough working conditions, low-level remuneration and part-time contracts, particularly in the hotel and restaurant segments.

As a result, companies often suffer from a shortage of skilled workers and face difficulties in retaining qualified staff. These challenges can result in a high turnover rate (in some cases 150% for employee position), which is responsible for high recruitment costs and declining productivity.

5. Responsible sourcing

Consumers’ increased interest in sustainability has driven the sector towards more open communication on suppliers, starting when some hotels explained the water consumption of their laundry suppliers.

SRI Investors should definitively consider companies’ purchasing criteria, with a particular focus on the restaurant and catering segment. Looking at food servicing, a major part of the environmental footprint is at the upstream level.

6. Franchising and hotel network values

The hotel industry has experienced a great deal of franchise development, cession of walls and management contracts. Such changes to ownership models are supposed to be invisible to final clients, but they influence the management of environmental and social matters at local level.

SRI investors should consider how hotels are monitoring these risks, considering clients’ satisfaction is directly correlated to hotel staff motivation.

7. Health and wellness

Obesity prevention and food allergies are both driving new consumption patterns as well as growing attention from health authorities.

Some big fast food restaurants chain have even spent millions to offer alternative cooking methods delivering same taste with less salt, or guaranteeing non-use of hydrogenated oils. Operations and marketing practices are deeply affected by these considerations, as companies don’t want to be targeted by regulators or miss a new consumer trend.

8. Food safety

Catering and restaurant companies must now ensure full product traceability and well implemented hygiene measures to prevent outbreaks. Chemical and bacterial contaminations are high-profile and consequently impact companies’ reputations.

Compliance to regulations, crisis management plans and proactive measures should all be examined by SRI investors.

9. E-security

Security used to be exclusively linked to clients’ physical protection; however, new technologies have introduced new forms of breaches.

SRI investors should also look at how prepared companies are to prevent attacks on clients’ confidential data. A major data leak can have devastating effects on reputation and will negative impact a company’s balance sheet.

10. Tax avoidance

Due to the complex franchise, joint-venture and subsidiary systems in the tourism sector, regulators view tax avoidance as a significant concern. SRI investors should keep a close eye on this topic.

Isabelle Cabie is head of socially responsible investment at Candriam

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