What’s ESG and why should I care?

According to Investopedia.com, “Environmental, social, and governance (ESG) investing refers to a set of standards for a company’s behavior used by socially conscious investors to screen potential investments.”

In other words, if you work in the timeshare industry; if you have a retirement plan; if the company you work for has a lending relationship with a bank or investment group; then you probably need to be aware of ESG. This system, widely adopted already in the E.U., basically requires that banks and lenders include an ESG rating in their assessment of companies requesting a loan.

Forbes’ contributor Betsy Atkins observes, “ESG issues were first mentioned in the 2006 United Nation’s Principles for Responsible Investment (PRI) report consisting of the Freshfield Report and “Who Cares Wins.” ESG criteria was, for the first time, required to be incorporated in the financial evaluations of companies.”
Let’s drill down on what ESG is comprised of: Environmental standards consider how a company safeguards the environment, including corporate policies addressing climate change, for example. Social criteria examine how the prospective borrower manages relationships with employees, suppliers, customers, and the communities in which it operates. Governance deals with a company’s leadership, executive pay, audits, internal controls, and shareholder rights.

The good, the bad, & the scary unknown

First, the good: In addition to environmental considerations, ESG guidelines are designed to ensure social responsibility by protecting employee rights and fostering positive working conditions. For example, many resort companies are offering diversity training programs and encourage staff members to take part in community service events. These steps are meant to help cultivate a healthier working environment while creating meaningful connections between a resort and its employees.

To comply with environmental requirements analysts might look for any pertinent problems in the timeshare and/or hospitality companies they review that might lead to trouble. For example, are resorts located close to nuclear or coal power plants, hard rock mining, or coal mining? How likely are their guests to be exposed to nearby prisons, agricultural biotechnology laboratories, or stores dedicated to the sale of guns and firearms?

Another concern might be to check whether or not prospective clients seeking financing have been embroiled in significant or recent disputes involving animal welfare, human rights, the environment, corporate governance, or safety.

On the positive side, has a company introduced any practices to proactively improve the environment, such as publishing a sustainability or carbon report, eliminating hazardous chemicals and contaminants, or working to reduce greenhouse gas emissions? Does the carbon footprint utilize renewable energy or decrease waste?

Does a hospitality or resort company use socially responsible supplier chains? Companies need to show they avoid using unsafe labor practices and purchase supplies and services from firms that are likewise responsibly minded.

To satisfy ESG demands of many large lending institutions, resorts must show they support the rights of LGBTQ+ individuals, respect and promote diversity in all its manifestations, and have measures in place to prevent sexual misconduct. Another requirement is to demonstrate that they pay reasonable (living) wages.
To comply with ESG’s ‘governance’ standard, investors might review a business to see if it accepts diversity on the board of directors and embraces corporate openness.

This all sounds pretty good, we might think.

What’s so bad about that?

Advocates of the new system (new as of approximately 2011) claim that studies have shown that the more corporate responsibility a company takes, the more successful they’re likely to be. Critics aren’t so sure. Politics has come into play when it comes to assessing ESG. While its proponents see a potential for the reformation of our country’s culture into a more harmonious, homogenous, and fair society; others are wary of a growing encroachment of financial institutions into private companies, local banks, and individuals’ 401K plans.

Now, to the scary unknown: What inspired this new level of consciousness? How far-reaching might it become? How likely is it that businesses with a genuine interest in these issues will be forced to compete with ‘greenwashing’?

ESG promises to become pervasive throughout the American landscape. One example: even the Academy of Movie Arts and Science has set representation and inclusion standards for Oscars eligibility by “encouraging” entrants to meet two out of four standards that show they include performers and writers from underrepresented racial or ethnic groups.

You can expect to be hearing more about SASB Standards. “SASB Standards guide the disclosure of financially material sustainability information by companies to their investors,” says the SASB.org website. Take a look at “The Walt Disney Company’s 2021 Corporate Social Responsibility Report from the SASB Index” to get an idea of the level of detail that can be supplied: https://impact.disney.com/app/uploads/2022/02/2021_SASB_Index.pdf

According to PwC.com, “Workforce diversity, equity and inclusion (DEI) has emerged as a critical issue for hospitality companies, who are already facing high turnover rates. Hotels are rethinking how to engage and promote employees traditionally overrepresented in low-paying, low-skill jobs. Upskilling these employees and creating new pathways for advancement are ESG priorities directly tied to business strategy and performance.

Related: Developing diversity, equity, and inclusion

“As ESG reporting and regulatory guidance evolve, companies that progress faster will not only be better positioned to react, they will also be likely to gain a competitive advantage by being at the forefront of the issue.”

“Examples of ESG metrics for the hospitality industry include:

• Climate change mitigation: Scope 1 and Scope 2 greenhouse gas (GHG) emissions.
• Climate change adaptation: Number of lodging facilities located in 100-year flood zones.
• Diversity and inclusion: Percentage of gender and racial/ethnic diversity at executive levels and in middle management.
• Labor practices: Voluntary and involuntary turnover rate for lodging facility employees.
• Water management: Total water consumed in regions with high or extremely high baseline water stress.
• Governance: Description of board oversight of ESG issues.”

While Disney and others might have the staff and resources to put together a very comprehensive and impressive program, what about smaller organizations in the timeshare industry if the demand for high ESG ratings becomes even more pervasive than at present?

Be afraid…be very afraid!

With a continuously growing and potentially invasive policy looming on the horizon, what should individuals in the industry be doing? The first step, of course, is to educate ourselves.

As an industry trade media company, we are not equipped to give any financial advice or guidance. But as ESG requirements evolve and as political players become more involved, we believe an alert to this situation is warranted.

Without trying to sound like a conspiracy nut, my own impression is that giving this power to rating agencies for banks to use is going to be a slippery slope. Firstly, Wall Street and the investment community are going to be in a position to call the winners and losers. One example of this is the comparison of the ratings of Tesla and Exxon Mobile. After Elon Musk bought the frankly left-leaning social media platform Twitter, Tesla – an electric car manufacturer – had its ESG rating plummet, while Exxon’s rate occupies a lofty position on the scale, despite its history of oil spills. Was Tesla’s drop a coincidence? One wonders.

In a Bloomberg article, “Who Regulates the ESG Ratings Industry?”, written by Kurt Wolfe, who is Of Counsel in the law firm, Quinn Emanuel Urquhart & Sullivan, LLP’s SEC Enforcement Practice, Wolfe takes a look at those calling the shots. He writes, “An industry of ESG “raters” has cropped up that rates companies’ ESG bona fides. If you’ve invested in one of the 700+ ESG exchange-traded funds (ETFs) in the U.S., one of these ratings providers probably played a hand in determining the fund’s investments.

Related: What is ESG and Should I Care?

“Those ratings providers—and the ratings themselves—face increasing scrutiny.

“There are calls for the Securities and Exchange Commission and other agencies to regulate the raters. Observers worry that ESG ratings lack clarity, rely on inconsistent criteria, and suffer from conflicts of interest that plague other ratings industries.

“Despite these concerns, ESG ratings providers’ services are in high demand. And for good reason. As investors struggle to find and compare “decision-useful” ESG disclosures, ESG ratings providers contrive to bridge the information gap.”

We’d like to hear your comments on this topic. Send your thoughts to me at Sharon@thetrades.com. Mark them as confidential if you do not wish me to include your name and/or company name should I wish to use your comments in a future article or post.

Sharon Scott Wilson, RRP, is publisher and co-owner of Resort Trades Media Group. Please connect with me and comment on LinkedIn.com/in/SharonScottWilson.