Small, high-end hotels in Quito, Ecuador, have adopted several environmental management practices in the areas of energy and water conservation, and waste minimization. This study looks at the main incentives, challenges, methods, and sources of innovation hotel management considers when implementing such practices. Theory building from case study methodology is used to develop a construct, which suggests that regulatory compliance alone is not enough for successful sustainable environmental management practices. To complement laws and regulations, a successful environmental management program includes the opportunity for the hotel to internalize the positive externalities generated by these practices. The adoption of technology and the training of personnel appear to be among the most important strategies to achieve this internalization of positive externalities such as environmental protection and natural resources conservation. These methods improve the hotel’s ability to reduce costs, enhance revenue, increase neighborly networks, and achieve personal satisfaction.