From the beginning of next year, the hotel sector will have to tighten its belt in relation to ESG and sustainability credentials or risk getting left behind as a new EU law could result in banks applying more charges to brown lending or shifting their focus and only providing debt to green assets.
Green asset ratio
From January 2024, banks will be required to publish their Green Asset Ratio (GAR) for the 2023 financial year, which will lay bare the ratio of their assets that finance and are invested in EU Taxonomy-aligned economic activities.
Ufi Ibrahim, CEO at the Energy & Environment Alliance explains further. “Central banks are putting pressure on banks to report on the types of assets that they're lending to in order to identify obsolescence risk, physical risk to assets and the transition risks related to assets in order to meet environmental standards set out by EU law.”
ESG on the backburner
However, according to figures from the Investment Association, UK investors pulled money out of responsible funds at a record rate in September, with responsible investment funds registering a record outflow of £544 million in September, meaning investors have withdrawn more than £1bn so far in 2023.
And it seems that interest rate woes, the high price tag associated with ESG, uncertainty amidst the wars in the Middle East, Ukraine and Russia, market volatility and the potential that the economy will suffer even more, have also led to hotel sector investors and hoteliers relegating ESG to the backseat.
Carine Bonnejean managing director, hotels at Christie & Co notes: “Sustainability is everything. But if you’re a private investor and sustainability comes with a massive bill attached to it, how do you pay for it? Until they feel like it will impact the business, they will put it on the backburner.”
However, Ibrahim warns this relegation is ill-advised and will indeed impact the business.
“Investors and hoteliers will start to feel the impact when they go to start accessing capital, initially from the large banks, from the large institutional investors, and we're already seeing that happening. But going forward, it's going to increase, and it will start trickling down throughout the entire global financial capital markets.”
Ibrahim adds that certain banks have begun to decline lending to projects which they believe won’t meet the EU taxonomy requirements over time.
“Banks are going to want to show that their ratios of green versus brown assets are improving over time. So we're going to increasingly see banks not wanting to lend towards assets which may not meet environmental standards going forward. The predominant measure of these standards is around climate- related risks to the asset, energy performance of the asset and whether the asset will achieve net zero going forward.”
Rob Stapleton, director, hotel capital markets at Savills agrees that there has been a growing focus on sustainability despite it seeming to take a back seat.
“While it feels like it has fallen back on people's agenda in the last couple of years, I think it’s definitely going to continue impacting investment decisions, particularly in that more institutional space where it's a now a requirement that things are at least measured, monitored and improved.”
And for a hotel sector which is looking eagerly forward to institutional involvement, it’s clear that ESG is an important consideration.
Growing global focus
Furthermore, the influence of the EU's environmental policies extends beyond its borders. The Corporate Sustainability Due Diligence Directive (CSDDD) is a major piece of EU legislation that will require EU and non-EU companies to conduct environmental and human rights due diligence across their operations, subsidiaries and supply chains.
“This will not only apply to firms within the EU but also to firms outside the EU who transact into bloc,” Ibrahim explains adding that financial markets worldwide are aligning with the EU’s approach.
She notes that China is working on corporate ESG disclosures. Hong Kong, Singapore, South Africa, Australia have mandated the non-financial accounting standards which means ESG reporting will have to start being audit grade with the same due diligence as financial reporting, and in the United States, the SEC has started to introduce climate-related disclosures which will take effect from 2024.
Hotel businesses, particularly those currently under the regulatory radar, face a strategic decision. Delaying ESG priorities may seem appealing in the short term but could lead to significant long-term consequences.
Ibrahim says: “It’s illogical to postpone ESG-related priorities because the sooner you start to address them, the sooner you can make more gradual changes so that you can spread the impact rather than waiting until you have to sell the asset, insure it or go to the bank to borrow money, at which point it will be too late to take any remedial action to improve performance.”
“The businesses that start to work on their ESG programs sooner rather than later are going to be the ones who are the winners. Those who fail to do that and keep postponing the decision are most likely to be the ones who will be the losers,” she adds.
What to do
For the hotel sector, the advice is clear: move beyond traditional sustainability approaches like carbon offsetting and focus on internal business practices.
Ibrahim advises: “The industry needs to rethink how it has approached sustainability in the past. Investors will start demanding more and more evidence that risks will be mitigated, and the emphasis will be on what you’re doing in your business.
Hoteliers will need to have capital allocation to address the gap between being on a net zero trajectory and not being on a net zero trajectory and the starting point is to have a transition plan for the asset.
“This is going to be absolutely key. What people who want to borrow from banks are going to have to do is to start thinking about how they're going to transition these assets to meet EU requirements as they're going to have to present these transition plans to banks.”