Applications for Net-Zero Carbon Programs in the Hotel Industry, with Cian Duggan

Episode Transcript

Cian: Both the brand value and enterprise valuation of being known to be a hotel chain that is on top of this. And again, particularly for finance or private equity owners, this is a big one. They do not want carbon liabilities in their portfolio companies.

Female: Going up.

Robin: Welcome to “The Innovative Hotelier Podcast” by “HOTELS” magazine, with weekly thought-provoking discussions with the world’s leading hotel and hospitality innovators. Welcome to “The Innovative Hotelier Podcast” brought to you by “HOTELS” magazine. I’m your host, Robin Trimingham. And my guest today is Cian Duggan, founder and director of UK-based Carbon Intelligence. And today, we’re chatting about applications for net-zero carbon programs in the hotel industry.

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Welcome, Cian.

Cian: Thank you very much, Robin. And thank you for inviting me along today.

Robin: Well, I think that this is going to be a very interesting conversation for a lot of our listeners because, you know, the term net-zero carbon emissions, that’s been around for quite some time. But I think with all the changes and stepping up of programs that there might be a lot of people out there who are sort of still confused regarding exactly what net-zero carbon emissions are.

So can you start us off here? Give us a little bit of a definition, if you will, and let us all know what first got you interested in helping everybody develop viable strategies for this.

Cian: Sure. So my background is mechanical engineering. That was my first degree. I did a master’s in renewable energy a few years ago. So energy and carbon have always been of interest to me. I started Carbon Intelligence 14-odd years ago now, and I started it because it became pretty clear to me that a lot of energy that companies, corporates were using was being wasted. So it started off being, I suppose, almost the definition of sustainability, which is do more with less, or, you know, try not to waste resources.

In the UK in particular, carbon legislation or carbon reporting legislation started to come into play about 10, 12 years ago. And that really got a lot of large companies, including pretty much all the major hotel chains in the UK were all of a sudden required to report how much energy or how much carbon they were emitting through their operations. And hotels are quite fascinating because as an industry sector, after staff and food for many hotel groups, energy is often the next biggest single line item on the P&L.

And yet, despite that, and this was true 10, 12 years ago, and it’s still true for many organizations today, energy and carbon is not being proactively managed by I would probably say many now, maybe no longer most, but certainly by many. And there are a collection of reasons for this. Structural reasons in terms of hotel ownership, who they report to, who they’re accountable to, and also just how much the guests are demanding any of this.

So net-zero, as a defined term, I would say, and it’s interesting you start there, Robin, net-zero is a continually evolving defined term, I would say, first of all. If we go back in time, 10 years ago, not many people were talking about net zero. People were talking about energy efficiency or cost savings, a little bit of talk about climate change and why maybe people should be doing this. And some organizations were talking about carbon offsetting and climate neutrality, being carbon neutral was a phrase.

It was probably three to four years ago that the net-zero definition started to come in. And then net zero and carbon neutrality were conflated for a while. But in the last 12 months, there’s an organization called the Science Based Targets, the SBTi, they have defined net-zero and what net zero means. And it’s a pretty tight definition. And in essence, what they are saying for the vast majority of organizations globally to be net-zero, according to their definition, a company must decarbonize all of their Scope 1, 2, and 3, and we’ll get into what that means in a bit, and then and only then can you offset the remainder. And the remainder is 10% plus or minus of the current carbon footprint for most organizations.

That’s a fairly hefty level of decarbonization, and 90% decarbonization requires a lot of things to happen over a long period of time. When we put net zero strategies and Science Based Targets strategies for our clients, they’re multi-decade programs. You know, it’s not something that just happens overnight or in a year or two.

Robin: So no just purchase some carbon offset credits sort of one and done then. Tell me how has the introduction of ESG or for those who don’t know, environmental, social, and governance initiatives increased the importance of addressing all of this for the hotel industry?

Cian: Yeah. So initiatives, I suppose they broadly fall into mandatory and voluntary. And again, so in the UK and Europe and certain states in the U.S., mandatory reporting is, and has been, and continues to increase and get more specific and more detailed. So if we go back 5, 10 years ago, there were some framework, some mandatory frameworks where hotel chains had to report mostly their Scope 1 and 2, which is predominantly the electricity and gas that they might use to heat, or to cool, or to light their hotels.

In more recent times, the mandatory frameworks globally are also asking for what’s called Scope 3. Now that’s the carbon emissions in everything else that is because you exist as a business. And the vast majority of that carbon is in the supply chain, purchased goods and services. So a lot of the work that we are now doing with our clients globally is looking at their supply chain and trying to understand the carbon hotspots and blind spots in the supply chain.

So, the ESG initiatives, the mandatory bits have been mostly focused on carbon. There haven’t been many mandatory social and governance-related aspects. But then the voluntary for many companies reporting to the likes of the CDP, you know, the old Carbon Disclosure Project are a plethora of other reporting frameworks to help investors, to help staff, to help customers know whether you as a hotel are better than your competitor in this area of ESG.

So they have definitely increased the importance, particularly if you’re a hotel who has got a lot of corporate clientele. The large organizations are beginning to ask ever more detailed questions about your ESG credentials as a hotel if they’re going to book lots of conferences or rooms globally.

Robin: So I wanna go back to something that you said because a global brand has enormous purchasing power in its supply chain. So what you’re really telling me is that the hotel brands are basically having the ability to impact green initiatives in the suppliers.

Cian: Absolutely. It’s one of the things that gives me great hope having been involved in the whole climate change carbon world for quite a while now. Seeing the large brands set targets of their own carbon, which requires them to understand their supply chain, requires them then to engage with their supply chain, and requires the supply chain or their suppliers, if they want to continue to be suppliers to at least start looking at this.

It’s driving action down to mid-sized and smaller companies in a way that I have not seen, you know, before. That this is really happening in the last 12 to 24 months, it’s a real new drive for action globally. And you’re right, the large global hotel brands have a huge ability to influence this everywhere where every country that they operate in that this is now a significant opportunity to help that locale, the locality and the country to decarbonize.

Robin: So this is a real game-changer in both our conversation that we’re having today and also in the hotel industry itself. I wanna explore this a little bit more if we can. So how are these hotels going to simultaneously work to create a workable net-zero strategy for themselves and also interact with their supply chain in a way that everybody comes out better?

Cian: It is a complex problem and not easily solved, not something that’s…again, it’s part of the multi-decade solution towards moving towards a global lower carbon where we get to global zero carbon, probably not, but we can extract a lot of carbon from the air with technologies that are already in play or in early stages. So what we have found over the years is that it all starts with understanding where you are. So it’s that classic adage of you can only manage what you measure.

So where we often start with our clients is to give them a deep understanding of, A, where they are now. B, where they are trying to go, which includes a lot of engagement with their supply chain. And then, C, or thirdly, to be able to know and report to themselves and to their wider stakeholder group, you know, whether it’s their investors, their suppliers, to report to those usually on a kind of a quarterly basis, are they on track, yes or no, for where they’re trying to go to.

So, again, a typical thing, for large hotel brands many now would be looking to sign up to things like a Science Based Target, like a net-zero target. And they will both be kind of multi-decade long aspirational goals and the biggest material part of the carbon being in the supply chain. This is what we found having done close to 100 now science-based targets for large global corporates.

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Can you give us an example of a brand that you’ve been working with on one of these projects?

Cian: Lots of examples of hotels that we’ve worked with, though many it’s been a difficult couple of years. So, sustainability has taken a little bit of a step back for many hotel brands over the last few years. So, I mean, we were doing a lot of work, for example, with a brand called the Village Hotels here in the UK owned by KSL, so private equity in the U.S. They have about 30-odd hotels here in the UK. And what we were doing for them was what we were doing for a lot of our clients, which is starting off with the Scope 1 and 2 IEV energy, electricity and gas that are within their own building because that’s where you can most easily directly impact.

And so we put in technologies, internet of things technologies into all of their hotels. We were able to take out thousands of data points per day, understand exactly what was going on with heating and cooling and lighting and control systems, and then work with the local hotels to reduce the energy in their own buildings. And very successfully, I mean, you know, we were getting 10% to 20% savings out of each hotel. It equated to, I think a run rate of about 800,000 pounds saving each year for them as a hotel group. So not insignificant, you know, you gotta sell a lot of hotel rooms to equate that sort of savings.

So the next stage then is to engage with the supply chain. And again, I would say hotels as a sector are probably behind other sectors. So if I give you some examples of other sectors where we’re very proactively working with the supply chain, one would be the professional services and law firms are very on top of this. The importance of doing and be seen to be doing the right things from a sustainability point of view is very important for the big global law firms. So they’re delving into their supply chains quite a lot.

In the construction area, the commercial real estate, actually I would say, and construction, they’re doing a lot of work, which would relate to a lot of hotels that are building out new buildings because the carbon in the buildings and the new buildings going up is a major thing now. The embodied carbon in buildings is going to be a significant component of a lot of the hotels. So we can kind of go into either of those, either continue more on the supply chain engagement and/or the kind of construction because they both are very interesting for hotels.

Robin: I think you’re making a lot of excellent points here because let’s be real, over the past couple of years, the hospitality industry has really struggled just to operate on a number of fronts, everything from would there be any guests coming through the front door and where could they get supplies of any kind given what was going on with supply chains in all industries during the health crisis.

As we come out of all of this, you know, hotels are looking to have maybe their first good season in two years or more, depending on what property we’re talking about. And what I’m reading is that travelers have changed during this time as well. Millennials, in particular, are incredibly interested in anything to do with green initiatives and net-zero carbon emissions. And I’ve read it’s even to the point where some of them are starting to research what the hotel’s policies are when they’re choosing where to book.

So talk to me, do you think that this is also impacting where they are deciding to work?

Cian: In our experience, yes. The biggest reasons for people to do something more, do something differently in this area of ESG or carbon is because of staff attraction and retention, it’s because of customer or guest attraction and retention, and it’s to ensure that if they need any finance, be it bank finance for loans or investment finance to build out, to renovate, refurbish, or build from new, those are the three main reasons why updated ESG policies or net-zero policies or net-zero goals are being implemented. Absolutely.

And yes, we have seen very clear signals from staff acquisition and retention. We’ve seen very clear signals from the financial community. You know, so any hotel that has got any amount of private equity backing, private equity people now, and a lot of that started with Larry Fink’s letter to shareholders about four years ago as the biggest asset owner in the world. And they’re saying, we are going to be asking questions about your ESG, about your climate change policies.

So yes, policies need to be updated. It has been existential for many hotels over the last couple of years, you know, and the hotel groups that we’ve worked with, we were trying to help them make sure that if hotels went from full occupancy to zero occupancy, to 10% occupancy, to 60%, you know, depending on the local restrictions that was happening, you know, in a lot of hotels and what we were helping them with was regardless of the occupancy level in the hotel, how can you optimize the energy, electricity, gas within the hotels.

That was what was most important so that conditions were being maintained for the guests, you know, which is critical, but also that costs and carbon were being minimized, you know, particularly costs. So, again, that’s kind of the Scope 1 and 2. And if any hotel group isn’t looking at that very proactively now, they’re definitely missing a trick because we know we can take 10% to 20% to 30% of costs and carbon out of any building globally. We’ve seen this time and time and time again. But that’s not enough going forward.

To avoid any challenges of greenwashing, every organization now needs to look beyond just their own buildings. Looking after your own building sensibly is almost the bare minimum. You do need to look into your wider, the Scope 3, the purchase goods and services, and at least have a plan for engaging your supply chain. Something that we’ve built as a business, you know, so we’ve got 150-odd people now working at Carbon Intelligence, a good 20 to 30 of those are working on our data platform, which is specifically now built to solve this supply chain, getting data from your supply chain challenge, and engaging with the supply chain from an ESG carbon point of view because it’s not an easy challenge, but it is one that we think we have solved.

It’s a combination of getting data from where it exists, creating carbon data where it doesn’t, engaging the supply chain, getting that updated data to update your own footprint easily because otherwise, it becomes a cottage industry within every organization, which it shouldn’t be because hotels are in the business of being great hotels, not gathering carbon and reporting on carbon.

Robin: Data crunching in a meaningful way, it really is a game-changer for any large industry, particularly hotels. We’ve talked a lot or alluded to some of the upfront cost of doing these things better. Can you talk to us at all in the last minute or two here what are some of the key financial benefits for going towards better carbon neutrality for the hoteliers?

Cian: Yeah. So you’ve got the practical cost savings from just not wasting electricity, gas, etc. Looking at your full carbon footprint, the biggest area to reduce your carbon footprint will be in getting good data from your suppliers. For any organization that is doing carbon offsetting, and that’s a very valid and good thing to do and it can be a great marketing exercise, but you only want to buy carbon offsets for as small a number as possible.

And so your big carbon footprint will be in your purchase goods and services. Getting proper, accurate data will reduce that significantly. We know, for example, that if you just take the standard data for buying web services, if you’ve got a website or things from Amazon versus getting the actual data from Amazon, for example, as a business, you can take your carbon content of those down by 40%, 50%, 60%. It’s a serious cost reduction there.

Then there’s the value or cost reduction for lower rates of interest. And this is an interesting one for financing large projects, you can get better interest now for green loans, green finance, and for any hotel chain that’s growing out that can be a big positive. And then finally, both the brand value and enterprise valuation of being known to be a hotel chain that is on top of this. And again, particularly for finance or private equity owners, this is a big one. They do not want carbon liabilities in their portfolio companies.

Robin: Well, Cian, this has been a fascinating conversation. You’re certainly involved in a cutting-edge industry, and I think there’s a lot that hoteliers can learn from you. I wanna thank you for chatting with me today. You’ve been listening to “The Innovative Hotelier Podcast,” brought to you by “HOTELS” magazine. Join us again soon for more up-to-the-minute insights and information specifically for the hotel and hospitality industry.

You’ve been listening to “The Innovative Hotelier Podcast” by “HOTELS” magazine. Join us again soon for more conversations with hospitality industry thought leaders.