As hospitality stakeholders continue to develop their sustainability policies, what does success look like beyond buzzwords and how can progress be measured?
There has been a huge step up in interest around Environmental, Social and Governance (ESG) initiatives among investors in recent years including in the green bond space, evidenced by Premier Inn owner Whitbread’s issuance of green bonds totalling £550 million last year.
“What we don’t see is a huge amount of difference in pricing between green and brown loans, but that’s just because there’s an issue around data collection and the industries coming up the knowledge curve,” explains Rekha Toora, Senior Vice President - Hotel Capital Markets at JLL.
“But banks will have to report on their green asset ratios from 2024 and that may result in a shift in the capital weighting which is requiring for the non-green loans and that in turn can lead to wider pricing difference.”
Investors want to know that when they come to sell an asset that there will be a market for it and that it will be compliant, she points out, with many institutional investors already integrating ESG into their investment processes and asset management. “We’re starting to see them drop deals because they’re not meeting carbon trajectories,” she says.
Legislation driving change, but standards still unclear
Regulation, she continues, is a huge driver in Europe, with the majority of global sustainable funds coming out of the continent, encouraged by the EU’s taxonomy for sustainable finance, aimed at improving the flow of money towards sustainable activities. To comply with EU rules, the onus is on asset managers and operators to measure and report on ESG performance – not just relating to operations, but capital spending too.
However, the difficulty is that standards and legislation are still evolving, points out Malcolm Kerr, Managing Director of Horwath HTL (UK). “It’s still quite a murky zone,” he says.
“There are international standards being developed right now and we fully anticipate within two years that those will be part of the general audit process. For owners and operators and us in advisory this is critical because we need to start the planning and preparation now.”
Although he is optimistic, he says that many owners, particularly independents, will be left behind: “There is a lot of hospitality stock in the UK and worldwide which will end up being not fit for purpose, not investable and very hard to audit.”
Future-proofing existing assets
Considering this and that approximately 80% of the buildings that will be in existence in 2050 already exist, Ufi Ibrahim, CEO of the Energy & Environment Alliance (EEA), says that the focus has to be on existing assets.
Toora says that investors are not only looking at the carbon efficiency of assets now, but their Carbon Risk Real Estate Monitor (CRREM) trajectory – an asset may have the green certifications in 2022, but if it’s stranded by 2025 on the CRREM pathway and the CAPEX required to bring it back in line doesn’t make sense, buyers will pull out, she says.
Understanding your assets and operations
Village Hotels, which is owned by KSL Capital Partners, has been using BREEAM as a measurement and guidance tool. “BREEAM is really useful because it tells you where you’re going wrong and where you’re going right,” says the group’s General Counsel Kelli Turner.
“In order to know where your sustainability targets need to be, you need to understand your assets and your operations.”
Knowledge is also key for Susan Bland, Managing Director, RBH Hospitality Management. She suggests that the social aspect of ESG is something that, as a people-focused business, the hospitality industry has understood for a long time and is an area where it’s perhaps clearer what you can do to make a difference.
Carbon, meanwhile, she suggests, is more complex while also being the biggest challenge for the sector given the scale and urgency of the issue.
“The science behind carbon reduction and all of the various initiatives and standards that are being worked on, the groups that are getting together to advise the strategies that big companies are putting out, it’s all to try and make sense of this carbon journey,” says Bland.
“For me the biggest thing that you as an industry can do is help people understand that part and get their heads round why that’s important and what I can actually do to make a difference and move in the right direction.”
Beware of greenwashing
Finally, when it comes to reporting, operators are warned to beware of greenwashing, which was itself a term coined by environmentalist Jay Westerveld in 1986 in an essay in which he criticised how hotels were trying to market themselves as being environmentally friendly by encouraging guests to reuse their towels, while making no further sustainable efforts and in fact just trying to reduce costs.
The EEA published a report late last year advising hospitality businesses on how to avoid accusations of greenwashing.
“This is about being able to substantiate environmental claims, evidence and substantiate your social claims. It’s not just what you’re doing and how you’re doing it, it’s how you’re assessing it. How do you tell whether it’s good or good enough?” says Ibrahim.
“It’s all very well saying that you’ve reduced your emissions by 20% but is that actually meaningful or not? It’s hard to know what good looks like,” agrees Toora. However, with the EEA collating data on hotel energy consumption, she expects that once that data is available it will allow investors to see where assets sit among their competitive sets, and that benchmarking will be used to assess viable investment opportunities.
Adds Ibrahim: “No asset type will be able to hide eventually. The question is: do you want to start now, do you want to be a leader, or do you want to be a laggard and a follower?”
All those quoted in the article appeared on stage at the Annual Hotel Conference held in Manchester between October 3 and 4, in a session called: The Sustainability Conundrum: Accreditation, Measuring and Reporting.