Tackling challenges in the hospitality sector: Embracing ESG

By Pablo Maldonado; Chair, HLB Mexico

The hospitality industry faces mounting pressure from rising operational costs, evolving consumer preferences, and increasingly stringent regulatory frameworks. Recent figures suggest that hotel profit margins are expected to decline due to escalating energy costs, while customers are showing a growing preference for businesses that prioritise sustainability.

Against this backdrop, Environmental, Social, and Governance (ESG) frameworks offer a lifeline—both for managing costs and increasing a company's revenue by enhancing its reputation.

However, the adoption of ESG comes with its own complexities. This article outlines how ESG adoption can help address some of the sector's most pressing issues and offers practical insights on how hotels can embed ESG into their core operations.

ESG quick-start guide

Businesses that succeed in implementing ESG frameworks are better positioned to not only reduce operational risks but also enhance their reputation in an increasingly sustainability-focused market.

As a complex framework, ESG is about embedding sustainability and ethical practices into a business model, from reducing carbon emissions to improving labour conditions and ensuring transparency in business operations. This can also be done by reducing energy consumption, investing in sustainable supply chains, and fostering a more diverse and inclusive workforce.

Although the ESG framework can be a powerful tool for addressing industry challenges, for many businesses, it can be a challenge in its own right. Due to the sheer scope of ESG, many hospitality businesses are still unsure how to begin their journey, what specific actions are required, or what the most relevant metrics are.

In other words, how can these broad criteria be translated into concrete metrics and actions that align with business goals and regulatory or consumer expectations?

How ESG helps businesses tackle key challenges

ESG frameworks can help hospitality firms tackle some of the most critical challenges they face today. Below, we examine key areas where ESG can deliver significant benefits.

Understanding costs

One of the most pressing issues in the hospitality sector is the rising cost of energy and other resources. Hotels, restaurants, and event spaces consume significant amounts of water, electricity, and gas, and these costs are only expected to increase. ESG frameworks encourage adopting more sustainable practices that reduce resource consumption, such as energy-efficient appliances, better waste management systems, or renewable energy sources.

Hotels rank among the most energy-intensive buildings, with energy costs being one of their highest expenses. As energy prices rise and pressure mounts to address climate change, many hotels are seeking ways to reduce consumption. For example, switching to LED lighting, which uses 75% less energy and lasts up to 25 times longer than traditional bulbs, is a common strategy.

A sustainable building is at least 20% more resource-efficient, contributing significantly to reduced utility costs. Most renewable energy sources are now cheaper than fossil fuels, and investing in hotels' on-site renewable power can increase security and control over supply and costs while aligning with customer expectations for environmentally responsible business practices.

Enhancing brand reputation

Another significant challenge for hospitality companies is building and maintaining brand loyalty in an increasingly competitive landscape. Customers are becoming more discerning, and many are now prioritising sustainability when choosing hotels or restaurants.

As consumer awareness around sustainability grows, hospitality businesses that align their operations with ESG principles can enhance their brand value. A recent survey by Booking.com revealed that three-quarters of travellers intend to stay at sustainable accommodation in the coming year.

Businesses that commit to reducing their environmental impact—eliminating single-use plastics, sourcing locally grown food, or adopting renewable energy solutions—are more likely to attract eco-conscious consumers. These efforts can also drive higher customer loyalty, as today's consumers increasingly expect businesses to operate in a socially and environmentally responsible manner.

Managing regulatory risk

The regulatory landscape for the hospitality sector is becoming more demanding, particularly around environmental impact. Fines and penalties for non-compliance can add to the sector's already heavy cost burden.

ESG frameworks help businesses stay ahead of regulatory developments by fostering a proactive approach to compliance. Integrating ESG principles helps hospitality companies stay ahead of the curve.

For instance, the European Union's new Green Deal is pushing businesses to achieve net-zero emissions by 2050, which will require significant changes in how hospitality companies manage their environmental footprint.

By adopting ESG practices early, hospitality companies can reduce the risk of future non-compliance. This may involve investing in sustainable technologies, improving waste management, or switching to renewable energy sources. While these initiatives require upfront costs, they mitigate the risk of future fines and help businesses avoid the disruptions that come with last-minute regulatory adjustments.

Improving employee retention

A lesser-known but equally important benefit of ESG is its impact on employee engagement and retention. The hospitality sector, which has some of the highest employee turnover rates globally—ranging from 30% to 73%—often struggles to attract and retain talent.

However, research has shown that companies with strong ESG values have better employee satisfaction rates. In a Society for Human Resource Management (SHRM) survey, 41% of employees, especially younger ones, considered ESG initiatives important. Executives placed even greater emphasis on ESG, with 51% ranking it as crucial. Additionally, 75% noted that ESG initiatives positively impact employee engagement, a key focus for leadership.

Hospitality firms that adopt ESG practices—whether through offering fair wages, promoting diversity, or ensuring safe working conditions—can improve employee satisfaction and reduce turnover. In a sector where high staff turnover can significantly impact service quality and profitability, investing in social sustainability is increasingly becoming a strategic priority.

Use ESG to your advantage

ESG is no longer an optional addition to a business strategy—it is an essential component for hospitality businesses seeking to navigate the challenges of today's market. By adopting ESG frameworks, companies can tackle critical challenges such as cost management, regulatory compliance, customer loyalty, and employee retention. Moreover, they stand to gain a competitive edge by aligning their operations with the growing demand for sustainability and social responsibility.

Expert guidance is essential for those looking to harness ESG's full potential. At HLB, we provide tailored ESG advisory services to help hospitality businesses integrate ESG practices effectively, ensuring regulatory compliance and maximising business benefits.

For further insight into how ESG can transform your hospitality business, visit HLB's ESG Advisory Services. To explore ESG adoption and its impact on hospitality more, check out our post on ESG Adoption and Hospitality: The Path Forward.