For all the small steps being taken in travel to improve sustainability, it will ultimately be institutional investors and other big money groups that help the sector navigate and fund a complicated transition into the future.
Against the backdrop of Climate Week NYC and the United Nations in session this week in New York City, a debate is raging about the best way for the travel sector to limit the effects of climate change and its effect on the environment.
Part of that dialogue was that while many hotel chains are banning straws and airports are turning to renewable energy, wider changes in the supply chains and with the business models of travel companies are truly needed to make a difference.
Small efforts do have an impact and are more fully noticed by potential customers, but few leaders in the industry have explained how exactly their businesses will finance important green transition efforts that don’t directly contribute to their companies’ bottom lines.
This divide was on full display at the World Travel and Tourism Council’s Travel & Tourism Climate & Environment Action Forum on Tuesday where leaders from finance, and not travel itself, showed a way forward for the industry as a whole.
Ultimately the panelists concluded that the forces of finance will compel travel companies to embrace sustainability: a company planning for the future that has the ability to avoid potential disruption from government regulation will be a much juicier target for institutional investors and have more access to capital from global banks.
“The investors are going to play a massive role in this,” said Gabrielle Walker, a strategist and climate change expert. “It’s not just sovereign wealth funds, it’s institutional investors, it’s retail investors, it’s a whole slew of new [financial] instruments, the Task Force on Climate-Related Financial Disclosures… I’m hearing investors everywhere saying, how do we do this, and businesses saying, we’re getting pressure from our investors to change when we used to get pressure from our investors to stay the same.”
Financial markets are finally paying attention to the importance of sustainability; one pegged global investment in sustainable strategies at $30 trillion, which has grown 175 percent over the last three or four years. Impact investment, which is more deliberate about sustainable outcomes, is growing at 800 percent now comprising a surging $500 million industry.
“The money is moving, but we have more enthusiasm from the investment community than we actually have investable projects and structures,” said Marisa Drew, CEO of impact advisory and finance at Credit Suisse. “Part of this, coming from a financial services point of view, is how do we create those investable opportunities that capture this enormous enthusiasm from the investment community?”
Drew also noted that millennial and Gen Z customers driving demand for sustainable products will become an even stronger force as they ascend to higher-earning positions in their career and inherit wealth from older family members. The opportunity is huge for players in travel and tourism to create investable opportunities with sustainability as the goal.
Regulation Is Coming
There is also the lurking specter of government regulation around the world, and companies that begin the long process of baking sustainability into corporate strategy will have a major advantage. This starts with understanding not just your company’s impact on the environment, but what the disruption caused by climate change will mean for the long-term prospects of your business.
“You’ve got to create information; information is the lifeblood of effective decision making,” said Curtis Ravenel, global head of sustainable business and finance for Bloomberg. “We’ve been missing the information about the impact of climate. Historically it’s been about how companies impact climate; now we’re trying to figure out how climate will impact companies’ financial performance. There is evidence that it will. The regulators are poised, there is regulatory activity everywhere… it’s just if you are domiciled in Europe, it’s if you do business in Europe. What I would encourage companies to do is begin the process [of proactive change], because it takes a lot of internal coordination.”
Change has been particularly slow in aviation, the sector of travel that emits the most carbon. While biofuels exist, they are usually two to three times more expensive than traditional kerosene fuel. Some airlines are blending biofuels into their kerosene fuel now, but are wary to increase the ticket cost of their flights lest their competitors gain a significant edge in consumer pricing.
“There is a fear to be punished because it is a very cutthroat competitive industry, and suddenly if your ticket prices are 20 percent higher, will your customers be flying with you at the end of the day?” asked Christoph Wolff, head of mobility industries for the World Economic Forum. “The global level playing field would ideally have a global carbon tax, everybody is agreeing on that. But in the absence of a global carbon tax, it could be like a fuel mandate, how the car industry was regulated.”
There could also be an optional choice for consumers to pay more for carbon offsets or flights fueled by biofuel blends.
It’s expected that widespread environmental regulation will take place in the next five years, with governments demanding that a transition occur from the old ways of doing business. Investors are looking now for companies to begin the transition before they’re forced to do so and to report honestly on how the climate will impact their businesses.
“Institutional capital money, at large scale, the commonality of language and comparison between investments… is what institutions need,” said Credit Suisse’s Drew. “People report on the stuff they’re good at, they do not report on the stuff they are not so good at. If you’re an investor, how do you differentiate and pick and choose amongst that? Regulation and harmonization of disclosure is important.”
For now, expect plenty of experimentation from investors as they seek to find structures that allow them to invest in sustainable businesses while still turning a profit. The combination of physical risk from climate change and policy risk from government regulation is leading to creative attempts from global finance to reward sustainability and conservation.
“We are trying to think of creative financial ways to save animals,” Drew continued, mentioning the strong conservation regulations enacted in Botswana. “We are working on something called the Rhino bond… where the investor gets paid a sliding scale for how many rhinos we actually save. And that is a very small end up the spectrum, but imagine if it is done properly there is no reason we couldn’t do it over and over again going from rhinos to elephants or whatever.”
Green bonds, too, will likely take on a larger importance for the travel sector as it embraces sustainability.
As travel and tourism begins its slow journey toward going green, expect the world of finance to play an outsize role in who is able to adapt with big money backing and which companies end up left behind due to backward thinking.
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Photo credit: Elephants roaming in Botswana. Visual Hunt