The cost nature of Environmental Management Schemes as a decision driver for

sustainability in the hotel industry

Karatzoglou Benjamin (MBA, D.Ed, PhD cand.) (1) Christorforidis Anastasios (Mech.Eng,
Owner, Manager) (2) Milonas Sotiris (Civil Eng. MBA, PhD cand.) (3)
University of Macedonia(1), ALTEREN SA Consultants(2), ALTEREN SA Consultants(3)
University of Macedonia, Faculty of Economics. 156, Egnatia Str, 54006 Thessaloniki Greece.
Email: venos@uom.gr1, chris@alteren.gr2, milonas@alteren.gr3

ABSTRACT

The recently published criteria of EU eco labeling for tourist accommodation services develop
new aspects in terms of EMS implementation at the hotel sector. The new EU eco label criteria
aim at limiting the main environmental impacts all along the three phases of the service’s life
cycle (purchasing, provision of the service, waste). In particular they aim to:

– limit energy consumption

– limit water consumption
– limit solid waste production
--favor the use of renewable resources and of substances which are less hazardous to the
environment.
– promote environmental communication and education

Simultaneously, established Environmental Management Systems, such as ISO 14001, manage

all the above as well as other recognized environmental aspects within a well-defined
environmental policy, attaining legal compliance, proper documentation, managerial control and
suggested corrective actions.

The paper presents in brief the characteristics and the implementation phases of both systems
(EMSs and eco-labels) as applied at the hotel sector and identifies their main advantages and
disadvantages at a comparative basis.

The comparative examination of the two systems, ISO 14001 and EU ECO LABEL, takes place
in terms of managerial, engineering and financial aspects and, making use of a comparative case-
study, it elicits conclusions on how EMSs will be adjusted in the future at the hospitality sector,
considering the mix of fixed and variable nature involved in their establishment.

The objective of the paper is to indicate that, disregarding other priorities, hoteliers will apply the
same line of thinking to decide on adopting that system which benefits them on a financial cost-
benefit analysis. The question is whether the same system will be beneficial to the local
sustainability as well.
1. INTRODUCTION

For the last twenty years, the environment has been widely acknowledged as an indispensable
asset for all enterprises. An asset, which is strongly impacted, in both spatial and temporal terms,
by the economic activities of those same enterprises. Activities consume resources and produce
wastes, and thus undermine the welfare and quality of life not only of the future generations but
also of the present one.

Tourism is an activity extensively dependent on the environment [1]. In its deployment, tourism
uses natural resources, such as beaches, forests, mountains, rivers and lakes, as well as man-
made resources such as monuments, ancient temples, cultural activities, historic cities and
heritage buildings. Over 14 million international tourists visited in year 2001 Greece to enjoy
these attractions (www.eot.gr official site of GNTO, visited 4/5/2003) and a target of an annual
influx of 20 million has been announced for the year 2004, the year when the Olympic Games
will take place in Greece. The number of domestic tourist overnights spent in Greek hotels is 8
times that of their international counterparts. The strain that all these visitors exercise on the
natural resource base of the destination areas is enormous and can result to irreversible damages
of a fragile low-resilience supportive ecosystem. The main administrators of these tourists are
the Greek hotels. Failure of the lodging facilities to manage the tourism influx in a sustainable
way and disrespect to the carrying capacity limits of a destination will result to an unintentional,
yet permanent, damage of the supportive natural infrastructure. International organizations and
private enterprises have been working for over a decade now on the preparation -and disposal to
the interesting parties, of a number of management tools that can help them measure their
environmental performance and take corrective action in those areas needed. These tools have
been traditionally taking the form of an Environmental Management System (EMS). An
alternative method involved the development of a sectoral eco-label, a certificate of compliance
with a number of preset standards. The decision of a firm to involve itself in the processes
required to gain a EMS or an ecolabelling certification, is, and should be seen as, an investment
decision. This paper attempts to compare and contrast in investment-cost related criteria, such
decisions from the viewpoint of investors.

2. THE LODGING SECTOR

Greece boasts an excessive number of tourism facilities. Over 8,200 hotels and 28,000 other
secondary establishments offer more than 1,000,000 beds to international and domestic visitors
[2]. Problems are exacerbated by the unequal distribution of these facilities both in space (islands
and the wider coastline accommodate about 80% of them) and in time (with over 70% of
international tourists arriving in Greece from late May to early September). Although one can
hardly deny the positive impact of the tourism phenomenon on the Greek GNP (6%, W.T.T.C.,
(2001), “Year 2001: Tourism Satellite Accounts (TSA): Research Summary and Highlights:
Greece”) and employment (10% of the labor force, EUROSTAT, (1999), “Tourism Trends in the
Mediterranean Countries”), one should not fail to notice the catastrophic impact that the high
concentrations of tourists can have on the local environment of the destination areas, especially
that of isolated areas such as small islands and mountainous regions. Fighting the problems that
resulted from the tourism phenomenon has largely been confined to limited individual initiatives,
practically by the Hospitality sector alone (with most well known the International Hotels
Environmental Initiative (IHEI) 1993, under the auspices of UNEP). Other sectors paid only lip
service to the effort until quite recently, when major international tour-operators undertook a
common effort to enhance the adoption of sustainable practices by the hotels they chose to
cooperate with (www.toinitiative.com). The hotel sector remained immune to criticism since
service providing companies were considered as non (or limitedly) burdening the environment in
which they operated. United Nations Environmental Programme (UNEP) indicated from 1999
that:

“Environmental management of tourism facilities, especially hotels, is being widely promoted

and progress is being made, particularly for larger hotels, in waste reduction handling,
management and disposal, and energy and water consumption. This has been promoted by the
main international industry associations and numerous industry associations at the regional and
national levels… However efforts today have been concentrated on measures which result in
short-term economic benefits, and there are still many major problems to be solved to put the
tourism industry to the path towards sustainability”(pp5) and that: “The key remaining
challenges facing the tourism industry are to:
(α) promote wider implementation of environmental management, particularly in the many
small and medium enterprises that form the backbone of the tourism industry, and spread
initiatives to all sectors of the tourism industry
(b) use more widely environmentally sound technologies…
(c) address the key-issues of siting and more eco-efficient design of tourism facilities…” (pp6,
UNESC [3]

Moreover, in Greece all hotels fall practically in the official Small & Medium Enterprises (SME)
classification of the European Union, with the great majority (>70%) belonging to the so called
micro-enterprises with fewer than 10 employees.

Hotel Num.of Max

Num. of Hotels % per Class. Avge.employment
Classification rooms employment
Family 1_20 3,548 43% 1.4 10
Micro 21-50 3.011 37% 4.8 25
Middle 51-100 1,075 13% 15.0 60
Big >101 610 7% 64.0 210
8,244 100% 8.8 210

TABLE 1: Greek hotel size classification Source: (ITEP, 1999)

Enterprises of such a magnitude are expected to lack the necessary human and financial
resources required to invest on a sustainable future. On the other hand, all stakeholders,
individual and institutional ones, are placing increasing demands for a wiser and more
sustainable treatment of the environment. Failure to comply with these requirements will result
to an immediate increase of non-compliance costs [4] and to a serious undermining of the
potential of a company to sustain profitable operations. This axiom holds particularly true for the
tourism sector where the central strut of the product sold remains the natural environment. Hotels
do not only have to operate in a sustainable way so as to maintain their assets, but they have to
make their attempts for sustainability publicly known to survive in an increasingly competitive,
globalized and diversified field. The Environmental Management Systems (EMSs) and the
Ecolabels were produced to simultaneously cater for both these needs.
3. EMS AND ECOLABEL IN THE HOSPITALITY SECTOR: AN INTRODUCTION

If the early quality systems were produced to maximize the positive output of firms, the early
EMS were produced to minimize their negative outflows and to rationalize their resource
consumption pattern. The ecolabel was a later inception, aiming at completing environmental
management at a product level. The tool is strongly related to the documentation of the
environmental performance of the products, securing that the latter follow a number of pre-
established criteria from cradle to grave. The nature of the two tools (namely EMS and
ecolabels) should be conceived as a complementary rather than an opposing/ redundant one. For
a number of years the application of an EMS was a one-way road for those hotels interested in
pursuing environmental excellence. Yet, recently the EU Commission decided the extension of
the Eco-label scheme to services (europa.eu.int/comm/ environment/ecolabel/producers/
pg_tourism.htm).

Tourist accommodation became the first service sector for which ecological criteria have been
developed, another indication of the particular interest of the sector to many stakeholders. The
ecological criteria for the award of the Community eco-label to tourist accommodation services
have been published (2003/287/EC) and have become valid from the 1st of May, 2003. These
criteria aim to

 limit energy consumption,

 limit water consumption,
 limit waste production,
 favour the use of renewable resources and of substances which are less hazardous to
the environment,
 promote environmental communication and education.

So, today there are two options open to hoteliers to achieve environmental certification:
officially recognized EMS such as ISO14001 or EMAS; and Ecolabelling schemes such as the
European Ecolabel (the Flower), or one of the many (about 50) ecolabelling initiatives in the
tourism field, present at an International, Regional, National or sub-national level. (For an
analytical presentation of these initiatives see the FEMATOUR project, pp.60-64, –
downloadable from europa.eu.int/ comm/environment/ ecolabel/producers /pg_tourism.htm).

This new order of things has created a necessity for comparisons between EMS and ecolabel
schemes in terms of their characteristics and the expected costs and benefits related to each
option. The sequence of criteria that hoteliers should apply in order to make relevant decisions
involves:

 The “recognizibility” of the certification by their customers, either tour-operators or

individual visitors
 The extra needs set by the environmental scheme chosen to close the gap between the
current and the expected performance
 The International and national market trends in the environmental schemes, resulting to
each scheme’s improved or deteriorated reputation and acceptance
 The costs related to the system installation. Such costs can be grouped in four categories:
feasibility study and consultancy related costs; asset acquisition and personnel training
costs; documentation and certification costs; and system maintenance costs
 The access to available environmental financing schemes from national or EU funds
The complexity of such criteria makes the relevant decisions painful for major companies, let
alone the sector micro-enterprises and SMEs. A summarized list of similarities and differences
follows in an attempt to help the decision makers distinguish between the two schemes:
Similarities
 Both systems require the definition and documentation of environmental policy
 The development of an environmental management program should be established
according to clause 4.3.4 of ISO 14001 and, similarly a precise action plan should be
produced to ensure the application of the environmental policy in an ecolabel case
 Training awareness and competence is required in both EMS and eco labeling.
 Documentation control is required for environmental management systems as well as for
eco labeling. However, documentation for eco labeling is more specific and includes energy,
water and chemicals consumption data.

Differences
 Ecolabelling is the certification of a product while EMS is the certification of a system. This
means that an EMS should certify an operation (process) while ecolabelling has been
recently extended to include intangible products (services)
 Ecolabelling does not require an initial environmental review because of the preset criteria
offered as minimum requirements.
 Operational control, emergency preparedness and response, checking and corrective actions,
and Management audit are requirements of an EMS while not applied under eco labeling.

4. THE EMS vs ECOLABEL CHOICE: AN INVESTMENT APPROACH

One of the strongest barriers for SMEs to the adoption of certified or non-certified environmental
protection practices has been identified to be the high cost required in the introductory phases of
the attempt. Other barriers involve severe time pressure, lack of trained personnel, low
awareness of environmental impact, negative attitude towards the environment, and economic
short-termism [5]. At another survey [6], entrepreneurs identified as their more important
constraints on business performance the following:

FIGURE 1: Major business performance constraints, by size of enterprise (2001, ENSR on SMEs)
The graph clearly indicates that poor access to finance is the major problem for micro-enterprises
while lack of skilled labor was perceived as the major constraint by SMEs. But what are the
motivating drivers behind the SMEs involvement in such an attempt? The same survey included
the following graph:

FIGURE 2: Drivers for the engagement of Spanish SMEs to env. activities (GMEE, Madrid 2001)

Although the graph illustrates the drivers for Spanish companies, it is indicative of a wider
reality (for a metadata analysis of 38 more relevant surveys on this issue read Hillary, 1999). A
reality where the prime motivators for SMEs, to engage themselves in environmental activities,
are the adaptation to the existing legislation and the public relations/ image of the company. Yet,
such motivators are adequate only for a reactive and superficial approach to the environmental
issue, not to a proactive and in-depth one. The environmental departments/ activities of the firm
are considered, under a responsibility accounting framework, as cost centers rather than as
revenue centers. And the performance of a cost center is maximized when the costs it incurs are
minimized and remain within the budget [7]. Furthermore, the same centers are perceived as
discretionary ones, a term indicating that little is known about the relationship between the
center’s inputs (operating costs) and outputs (impact on the firm performance). So, traditional
investment analysis tools, such as the Net Present Value, Internal Rate of Return or Discounted
Payback Period, can not be effectively used to decide on the an EMS/ Ecolabel adoption or
rejection decision since part of the relevant costs and the totality of the expected benefits cannot
be quantified. The difficulty in assessing the value-added of these schemes relates to the inherent
lack of standardization, labor dependence and impact on the strategic positioning of the
company. A number of theories have attempted to assign economic values to the application of
such schemes (hedonic pricing, contingency theory) but none of them has been widely approved.
There is a huge literature on the expected (financial, legal, market, cost of production,
stakeholder-related) benefits reaped from the application of an EMS or an Ecolabel, all of it of an
explanatory (what?) rather than of an exploratory (how much?) nature.

5. THE EMS VS ECOLABEL CHOICE: A COSTING APPROACH

As it regards the costs related to the application of an EMS or of an Ecolabel, they can be
grouped in four categories, with common labels but different content:

 preparatory and consultancy costs;

 asset acquisition, asset improvement and betterment, and training costs;
 development of relevant documentation, registration and certification costs;
 annual scheme maintenance costs.

The cost-structure of both schemes is dominated by fixed costs. The reason is the asset
investment and labor dependency required by both schemes for their application. Yet, increased
proportion of fixed costs is indicative of:

 A higher break-even point

 A lower margin of safety
 A higher operational leverage and therefore a higher risk undertaken because of the
increased inability to adapt to changes while operating in a highly volatile industry such
as that of tourism.
 The use of budgets as the only way to achieve a tight cost control (Brandon& Drtina,
1997)

The cost related to the implementation of an EMS or Ecolabel is a direct function of the time and
effort required by the employees to meet the scheme standards. The investment cost can be
calculated along the initial environmental review, by the gap analysis between the scheme
requirements and the current situation of the firm. In the case of an EMS there is a higher
elasticity as it regards the standards set and the required metrics for each standard, while in the
case of an Ecolabel a common predefined set of criteria, established by the Commission has to
be met. The rigidity of the requirements in this latter case makes it more difficult for a small low-
budget firm to pass the adoption threshold and may operate as a barrier for the Ecolabel. On the
other hand the dynamic nature of EMSs allows a lower threshold but demands new targets set for
each year and embraces the continuous improvement concept in the schemes’ applications. An
analysis of the future (proforma) Income statements and Cash flow statements of the company
becomes a prerequisite for the financially most appropriate decision. Similarly, the amount paid
on an annual basis for the repetitive EMS certification of a company is fixed and relates mostly
to the size of the company. On the other hand, the re-certification cost for an Ecolabel is a
function of the taxable revenues earned by the company along the accounting year (0.13% with a
maximum of 23,000 euros). In this case the adoption of a EMS increases the fixed costs and the
operational risk for the company. Since the total amount of risk (operating and financial) that a
company can tolerate is more or less constant [8], it becomes evident that the capital structure
(debt to equity relationship) of the company should be carefully considered before resulting to
the optimal decision. Actual figures for an average-size, urban Greek hotel are given below,
indicating the costs to be undertaken if it engages in the adoption of an EMS/ Ecolabel.

Eco labeling Comments

New boiler 3,800 € - For a 330 KW boiler burner replacement
Air conditioning 31,850 € - For the replacement of all split – unit air
Automatic switch off lights 300 € / conditioners with a central 217 KW air-cooled
Assets
room chiller and fan-oils units
Replacement of 60% of lights bulbs - Cost of each compact fluorescent lamp (CFL) 3-
3-10 € / lamp 10 € / lamp. Simple payback period for a lamp
 displacement approx 2yrs
Automatic switch off air conditioning and lights
€ 8,000 For: Initial environmental review
Consulting Policy and program
Training
System maintenance Max € 23,000 Cost of eco labeling rights
EMS (ISO 14001 –
EMAS)
Assets Same as above Same as above
Approx € 10,000 For: Initial environmental review
Policy and program
Training
Manual and procedures
Consulting
Documents and records
Audits
Environmental statement

System certification € 3,500

System maintenance € 1,500 for certification every 3 years
Approx 0.15% of initial assets for
continuous improvement

6. CONCLUSIONS

Tourism is among the biggest industries on earth with a high potential for the future. Apart from
its positive impacts on the economics of the destination countries, tourism has been accused of
negative impacts on the local environment. These impacts mostly originate from the activities of
the hotels operating in the destination areas. Technology and management sciences have
produced solutions that can potentially minimize, even eliminate these negative impacts. The
‘institutionalization’ of these solutions resulted to the birth of management tools classified as
EMSs or as Ecolabels. Companies, because of their profit-seeking priorities, confront these
newly developed schemes as investments. This paper indicated that the discretionary nature of
these investments as well as the subtle differences in their cost structure involved, require a very
careful financial analysis before the final decision is made in order to avoid pitfalls that will
result to increased costs, risks and inelasticities and that will turn a potential environmental
benefit into an economic drawback.

7. REFERENCES

1. Sinclair, Thea and Stabler, Mike (1997) “The Economics of Tourism”, Routledge, 2nd
Ed.(1998), London, UK
2. Papanikos Gregory, (2001), “A Regional Analysis of Greek Hotels”, Institute of Tourism
Research and Predictions (ΙΤΕP), Athens, Greece
3. United Nations Economic & Social Council), Commission on Sustainable Development:
Report of the Secretary General(15/1/99) “Tourism & Sustainable Development E/CN17/1999/5
4. Environmental Protection Agency & ACCA (1995), “An Introduction to Environmental
Accounting as a Business Tool”, USA
5. Hillary Ruth, 1999, “Evaluation of Study Reports on the Barriers, Opportunities and Drivers
for SMEs in the Adoption of Environmental Management Systems”, submitted to the
Department of Trade & Industry, Environment Directorate, London, U.K
6. The European Commission-The European Observatory for SMEs, 6th report submitted to the
Enterprise DG by KPMG, Luxemburg, 2000
7. Brandon, Charles & Drtina, Ralph, 1997, “Management Accounting: Strategy and Control”,
McGraw-Hill, International Ed
8. Bernstein, Wild & Subramanyam, 2001, ‘Financial Statement Analysis’, McGraw-Hill, USA