|
Insight Comment |
With the Cop26 climate change conference underway, we thought we’d turn our attention to one of the newer environmental bits of environmental legislation to appear in the last couple of years: the EU taxonomy for sustainable finance.
What is it?
The taxonomy is the EU’s attempt to classify what counts as a sustainable activity. It all stems from its own climate and energy targets as well as the continent-wide Green Deal.
The idea is that finance should be directed towards activities that “make our economies, businesses and societies – in particular health systems, more resilient against climate and environmental shocks.”
The Taxonomy Regulation itself came into force in July 2020 and set out six environmental objectives.
- Climate change mitigation
- Climate change adaptation
- The sustainable use and protection of water and marine resources
- The transition to a circular economy
- Pollution prevention and control
- The protection and restoration of biodiversity and ecosystems
What happened next?
The EU followed up the taxonomy in April this year with supplementary legislation with a further package of measures aimed at improving “the flow of money towards sustainable activities”.
It then followed this up in July with another series of measures, including the Sustainable Finance Strategy and European Green Bond Standard.
Another key update to the taxonomy was a new “Delegated Act”, which will require “financial and non-financial companies to provide information to investors about the environmental performance of their assets and economic activities. Markets and investors need clear and comparable sustainability information to prevent greenwashing.”
So what does this all mean?
As can sometimes be the case with the EU, the volume of legislation can make things quite confusing. The overall message though is that the EU wants investors to target green initiatives.
How does this all relate to hotel investment?
In the grand scheme of things it might be better to think of this all as a pyramid. As Ufi Ibrahim, CEO of the Energy & Environment Alliance explained to me: “The European Commission and regulators sit at the top of the pyramid, followed by the financial community including institutional investors, pension funds, and lenders. Individual hotel assets sit at the base of the pyramid.
“This top-down system is designed to steer financial capital into sustainable investments with a view to achieving EU Green Deal objectives, namely a Carbon Neutral EU by 2050 and a 55% cut in CO2 emissions across the EU by 2030. This is a regulatory vehicle, so to be compliant with law and to be able to access financial capital, the hotel industry will need to comply with EU taxonomy rules.”
When does it start?
A lot of companies are already using the taxonomy and have been voluntarily reporting.
The renamed Corporate Sustainability Reporting Directive, which is part of the broader sustainable finance framework, will be mandatory from January 2022 for the climate change mitigation and adaptation objectives, and from January 2023 for the other four objectives.
Does it apply to brands, operators or investors?
As noted earlier, everyone in the hotel investment ecosystem needs to pay attention.
“Driven by mounting pressure from regulators, investors must report in line with EU taxonomy ESG classification rules including climate mitigation and adaptation. To comply with EU rules, the onus will be upon asset managers and operators to measure and report on ESG performance. These measures will relate not just to operations, but also OPEX and CAPEX decisions. To avoid fines, forthcoming carbon taxes and costly greenwash related reputation damage, measurement will need to be robust, science-based and objective. In other words, no black boxes, rather credibility, transparency, and objectivity,” Ibrahim said.
Inge Huijbrechts, global senior vice president sustainability, security and corporate communications at Radisson Hotel Group, explained how when different stakeholders work together for something like a renovation project they "will also need to prove that these costs fall within the criteria.”
How well is the industry doing?
Plenty of companies are taking this very seriously. For years it was easy to get away with ignoring consumer or governmental pressure for industries to behave in a more environmentally responsible way. Let’s be honest, businesses might have continued to pay no attention to the green agenda but now there is a financial imperative they are starting to act. If you’ve got a hotel asset that you’re looking to sell or refinance then you’ll suddenly find your options more restricted if you haven’t been diligently following the EU’s new guidelines.
What about in the rest of the world?
The United Kingdom and even the United States look like they will be bringing in their own frameworks over the coming years, making it even more important for hospitality investors, operators and brands to get their own houses in order.