Sustainability is no longer an optional add-on when it comes to investment in the hospitality sector but is now a critical pillar in decision-making processes.
From an understanding of ESG being integral to investment-facing job roles in future to the growing financial pressure on banks to demonstrate sustainable lending practices, experts at the Energy & Environment Alliance’s Sustainability Symposium warned environmental considerations are quickly becoming a core part of investment strategies.
Evolution of ESG in decision-making
Alexander Garrod, managing director at Pro-Invest Group noted an increase in the incidence of ESG considerations being integrated early into transactions and influencing due diligence.
“ESG officers are a lot more prevalent than they were five years ago and are now involved much earlier in the dealmaking process. They're really setting the standard that the investment should be trying to achieve, the work that’s going to be undertaken and the cost and the timing to achieve that.”
David Kellett, managing director, head of Alternative Investments Europe at Invesco goes even further, stating that an understanding of ESG will become a core part of investment and asset management roles.
“In the next five years, an understanding of ESG is going to be a core part of the role of investment managers and asset managers. ESG has become part of the real estate decision making. In the past it was essentially just a sideshow but now it has to become fully embedded in how we make decisions.”
Ioanna Paschalidou, managing director & head of portfolio management at Henderson Capital Partners agrees, noting that while the focus was previously just about obtaining certifications, that’s no longer the case, especially when trying to appeal to institutional investors.
“Now what we see is we need to include the CRREM analysis, what's the net zero pathway for that asset? We’re looking at EU taxonomy compliance as part of the due diligence process alongside everything else we used to do before. Although we didn't look at these things in such a focused manner for hospitality assets in the past, this will be the case going forward.”
“Institutional investors have increasingly higher requirements ESG requirements. Maximising the pool of buyer and tapping into European buyers - who are one of the most sophisticated right now - one needs to demonstrate that going forward all necessary actions will be taken to set processes in place - at firm level, at asset level, with suppliers, with operating partners – and to have the right budgets in place to implement these actions.”
Additionally, Joanna Kurowska, managing director for UK and Ireland at IHG Hotels & Resorts notes “When I speak with our owners about sustainability or the ESG agenda, one big focus is that the value of our assets are going to decrease materially if these assets are not protected in terms of the sustainability agenda. We’re on the cusp of a sustainability revolution.”
Green financing
Further driving this revolution is that banks are now adopting a more proactive approach on the back of new rules such as the requirement to publish their Green Asset Ratios and reveal the ratio of their assets that finance and are invested in EU Taxonomy-aligned economic activities.
“Certainly in the Nordics, we see that banks are getting more and more sophisticated and have a lot of really competent in-house capabilities, and so they can cut through the noise and buzzwords very, very quickly,” says Thomas Laakso, CEO at CapMan Real Estate, adding “Banks are motivated, in some cases maybe under pressure themselves to do something.”
And so he says that banks, especially those in the Nordics are actively scouring and searching for the chance to offer sustainability linked loans to those who have a proper plan in place.
Caroline Tiveus, senior vice president, director of sustainable business at Pandox concurs, noting that banks in the Nordics are increasingly active in giving sustainability-linked loans and pushing companies to get on the net-zero pathway, adding that a commitment to science-based targets is a plus when discussiong green loans with these lenders.
However, Aidan McNulty, chief revenue officer at Omnevue warns that the era of banks using favourable lending terms as carrot will soon come to an end.
“Banks are now under pressure. From my conversations with commercial banking CEOs and CFOs, it’s clear we’re going to see a lot of aggressive marketing and targeting of the companies within their portfolios that are contributing most to their emissions problem. It’s starting off as the carrot but not too far in the future, it’ll be the stick. They will start withholding financing unless you get on board because it will be detrimental to them otherwise.”
Data
And a great way to implement change and demonstrate compliance is through data which can be used to make meaningful decisions to aid progress on the path to sustainability. However, the availability of data is a big hindrance, says Nagadarsan Suresh of Partnership for Carbon Accounting Financials especially when trying to make predictions and forecasts.
“There are a number of assumptions that go into the creation of such data which is not uniform. The availability of high-quality, discernible and dependable data is probably the biggest challenge. There has to be a level of standardisation,” he adds.
Kellett and Kurowska agree.
Kellett notes: “There’s the challenge of whether there are people in the business to validate that data. For example, we all know when revpar is underperforming just by virtue of what type of hotel it is and where it’s located. So when we’re looking at ESG data, we need relative stats and a benchmark. The challenge is making it something that you can actually contextualize and drive action out of. We're at a stage where we’re still collecting but it has to be accurate and audited. Otherwise, what's the point?”
“None of these conversations will have any value if we don't agree on what our starting position is. My big advocacy towards our hotels, investors and stakeholders is to collect data on energy consumption so we can all know what the actual size of the challenge is,” Kurowska adds.
Suresh points to AI as a possible solution. “AI can play a big role in validating our assumptions around EPCs for example or understanding how much a particular type of material can emit in terms of carbon emissions. Using AI can really help because a lot of these numbers and assumptions might be wrong because they’ve been done many years ago and things have changed quite a lot,” he says.
Experts add that any data extracted has to be comparable to financial data, with McNulty and Kellett noting that if data can be translated into financial metrics, it creates a much clearer incentive and there’ll be higher motivation.
Looking forward, they stress while actually possessing the data is important, it’s important to not get too caught up on that but instead move forward to actually taking action.
It’s clear that the sector stands on the cusp of a sustainability revolution, driven by financial, regulatory and societal pressures. While challenges remain - particularly in the areas of data availability, standardization and validation - technology presents a possible solution.