Hotels are facing increasing pressure to address their environmental impact and adopt sustainable practices in the wake of rising global carbon emissions. In order to align with international climate target goals and comply with emerging regulations, the hospitality industry needs to develop an encompassing environmental, social, and governance (ESG) strategy to tackle its carbon footprint. These hospitality ESG strategies will likely encompass a carbon offset plan to address the inevitable carbon footprint stemming from real estate development or operations. Failure to proactively adapt to these emerging standards could pose future financial and operational challenges for the sector.
The lifetime carbon footprint of the hospitality industry
The annual carbon footprint of the hospitality industry is estimated at 3% of global carbon emissions in 2022. According to the United Nations World Tourism Organisation (UNWTO), one-third of these emissions are produced by hotel operations.1 The rest are “embodied carbon” i.e., carbon emitted during the development/renovation phase of hotels. Tackling and accounting for embodied carbon is rarely addressed in hospitality ESG strategies, but they account for a substantial portion of a hotel’s lifetime carbon emissions. Academics suggest that hotel construction alone could contribute up to an estimated 2% of global emissions, assuming hotels produce one-tenth of the emissions produced by building construction and renovation.2
Figure 1: Global hospitality industry’s annual contribution to global carbon emissions
The cost of carbon credits for hotels
The cost of carbon credits can vary widely, influenced by market dynamics, time of purchase, the type of project the credits fund (e.g., reforestation, renewable energy, methane capture), and their certification standards. To determine the need and cost of carbon credits, it is essential to understand how much carbon a hotel produces on average during construction, renovation, and operation. During operations, a hotel’s carbon emission can average 0.16 to 0.20 tonnes of carbon dioxide equivalent (tCO2e) per square metre (sqm), annually. Hotels will typically pay USD $10 to $12 per sqm to completely offset their carbon emissions if they purchase carbon credits at the price of European Union Emissions Trading System (EU ETS) carbon permits, as of year-end 2023. Embodied carbon produced during construction and renovation varies due to different hotel designs, sizes, construction methods, and materials. Offsetting embodied carbon emissions for a newly constructed hotel might typically cost less than 1% of the development cost if a project is certified with LEED, BREEAM or similar, and constructed with the latest carbon-friendly materials and methods.3
Carbon credits can address short-term sustainability targets and embodied carbon
The industry is advised to move beyond mere carbon offsetting and focus on significant reductions through innovative technologies, renewable energy adoption, energy efficiency improvements, and sustainable practices. Even if hotels adopt internal sustainability practices, the vast elimination of carbon emissions, such as embodied carbon emissions from hotel construction and renovation, can be unattainable. Carbon offsetting will remain the most accessible and effective way to meet short-term sustainability targets while the industry becomes more adept at operating with sustainability practices and infrastructure. Of the 34% of hospitality accommodation businesses with Climate Target strategies studied by the World Travel & Tourism Council in 2021, 87% have planned to use carbon offsetting to achieve their environmental targets.4
Figure 2: What are your organisation’s key priorities in the next 12 months?
Source: Deloitte EHIC industry sentiment survey 2023
Mounting indirect pressure of sustainability regulations, mainly the Corporate Sustainability Reporting Directive (CSRD), on the hospitality industry
The Deloitte EHIC industry sentiment survey 2023 found financing/lender considerations, as well as sustainability and climate change initiatives, are among the top 10 priorities for hospitality executives in 2024. Hospitality lenders are also prioritising ESG, in addition to asset cash flow in the current inflationary environment.5 This year, the hotel industry faces a pivotal shift as new EU regulations mandate financial institutions to disclose their Green Asset Ratio (GAR), revealing the extent of their financing towards EU Taxonomy-aligned activities.6 This move, aimed at identifying risks and ensuring compliance with environmental standards such as CSRD, signals tighter scrutiny of sustainability practices whilst considering funding for the hospitality industry. Companies in scope for CSRD may at first be only required to have limited assurance, but over a period of four years, they must move to reasonable assurance. The hospitality industry, therefore, stands at a crossroads: delay ESG integration at the risk of future financial and operational challenges or proactively adapt to meet these emerging standards.
The strategic use and reporting of carbon credits
The demand for transparent, quantifiable information on decarbonisation efforts has prompted the International Sustainability Standards Board (ISSB) to propose disclosure requirements related to environmental credits in its forthcoming standards. The Climate Exposure Draft, for instance, mandates disclosures about an entity's transition plans, including the use of carbon credits/offsets, the nature of these offsets (carbon removal or emission avoidance), and their verification or certification by third parties. Similarly, CSRD, in its draft standard on climate change (ESRS E1 Climate Change), requires entities in scope to disclose greenhouse gas (GHG) emission reductions financed through carbon credits. These evolving standards reflect a growing emphasis on the integrity and quality of carbon offsets, underscoring their impact on a hotel’s enterprise value and their reasonable use of carbon credits.
There are currently no established accounting requirements specifically for carbon offsets under International Financial Reporting Standards (IFRS) or US Generally Accepted Accounting Principles (US GAAP). The accounting of carbon credits therefore requires judgement and depends on a number of factors such as the purpose of the offset i.e., whether it will be traded in the future or retired after use. Other considerations include whether the credit should be classified as an intangible asset or as inventory; whether the cost should be expensed upon retirement or whether it should be amortised over the life of the credit; the length of the credits’ useful life; and whether the asset needs to be assessed for impairment.
Outcomes of pursuing sustainability targets for hotels and next steps for responsible use of carbon credits
As regulatory environments tighten and consumer preferences shift, sustainable properties will likely face fewer risks and enjoy enhanced marketability. Greener hotel assets will also likely have more access to capital and debt financing, making the assets more desirable for transactions. Within a broader ESG framework, using carbon credits will inevitably be a part of the hospitality industry’s net-zero strategy. Any audits or reviews to qualify a hotel as a “green asset” may include assessing their carbon credit strategies until net-zero development and operations are possible realities in the long term.
To effectively integrate carbon credits into their sustainability strategies, hospitality investors, owners and asset managers require a deep understanding of their assets’ lifetime carbon emissions and a commitment to assess and report emissions accurately. In using carbon credits, one should:
Early adopters can gain a competitive advantage by creating a clear carbon offset strategy now, aligning with regulatory shifts and meeting the demands of eco-conscious consumers. Ultimately, the hospitality industry will only enhance its environmental stewardship and image as a sustainable business by applying an informed, considerate, and ethical ESG approach.
If you found this article interesting, you may also be interested in our European Hospitality Industry Conference survey findings.
References
1. Net Zero Coalition, United Nations Climate Action, (n.d.), https://www.un.org/en/climatechange/net-zero-coalition
2. Sustainable Real Estate – Increasing Pressures for Hotel Investors, Hotel Year Book (HYB), 2023, https://www.hotelyearbook.com/article/122000199/sustainable-real-estate-increasing-pressures-for-hotel-investors.html
3. The Hotel Industry’s Big Carbon Lie, Bloomberg, 2022, https://www.bloomberg.com/news/articles/2022-07-19/embodied-carbon-is-dirty-secret-of-hotel-industry-greenwashing-eco-ratings
4. A Net Zero Roadmap for Travel & Tourism, World Travel & Tourism Council, 2021, https://wttc.org/Portals/0/Documents/Reports/2021/WTTC_Net_Zero_Roadmap.pdf
5. Lenders step up in response to debt market shifts, Hospitality Investor, 2024, https://www.hospitalityinvestor.com/finance/lenders-step-response-debt-market-shifts
6. How ignoring ESG could hurt hotelier’s finances in 2024, Hospitality Investor, 2023, https://www.hospitalityinvestor.com/esg/how-ignoring-esg-could-hurt-hoteliers-finances-2024
Alex is a senior manager within the Accounting, Reporting & Advisory team. She provides accounting and financial reporting related support under IFRS, UK and US GAAP. Alex focusses on ESG, assisting clients with their ESG reporting and related financial disclosures