ESG is increasingly becoming a more important consideration when assessing new investments and can have a material impact on pricing and liquidity, according to speakers at the Energy and Environment Alliance Summit.
ESG has risen up the agenda in recent years following the publication of the EU taxonomy classification system meaning that failing to be ESG compliant could mean stakeholders are sitting on assets which values are vastly and quickly diminishing.
“If you're able to offer a lower risk product in the form of a high ESG compliance hotel, logically you should be getting better terms on your credit side. And in the future, it will come to a point whereby it won’t just a be a question of better terms, it will be a question of whether you’re getting a senior loan or you’re not,” said Sabine Schaffer, co-founder and CEO Europe at ProInvest during the Hospitality ESG Investment session.
Caroline Tiveus, senior vice president, director of sustainable business at Pandox also noted that in their selling processes, there have been more questions around ESG and taxonomy compliance.
“We’ve also started looking at this in our acquisitions; [we’re] currently working on how to calculate what we’re getting and what we need to do in the transition journey to make them green. We’re planning to have it in place by the end of the year,” Tiveus said.
Potential obsolescence
Christopher Penny, senior vice president, European hotel asset management at Starwood Capital agreed that ESG is increasingly getting ingrained into investment decision-making upfront because of potential obsolescence risk as EU taxonomy rolls out.
“In 2019, ESG was on the tickbox but it wasn’t a massive driver. In 2020 and 2021, it was rising up the agenda politically but those years were about ‘do we have the cash flow to actually fund any of it.’ All of a sudden in 2022, the EU taxonomy was out and we did need to start considering if there was an obsolescence risk in any of our investments,” Penny said.
To ensure that assets continue to retain their value, speakers stressed the importance of data in relation to the full energy use of assets and the full footprint of hotels.
“What we typically go for is a full suite of data around energy use, waste management, water use. And I think the industry has started to adopt the Carbon Risk Real Estate Monitor (CRREM) model as the industry benchmark,” Ben Patton, head of real estate debt at Federated Hermes, said.
“If you're in a banking environment, or if you're managing institutional or pension scheme capital, we are going to be very focused on lending against those hotels where there isn't a stranded scenario, certainly within loan term and probably within a good period after that so there’s no refinancing risk.”
However, he noted that there’s a huge part of the banking market funded by the alternative lending space, which are very keen to look at the transitional element.
“There’s some real value in funding transitional hotels. There could be scenarios where you have a hotel that is potentially stranded during the loan term but with investment can be compliant. Lenders that have more varied sources of capital are probably looking for investments where with some input, the assets can be developed and made compliant over time,” he said.
But with all of this, he stresses again the importance of having extensive data. “Data is key. If you don’t have any data, you run the risk of having very limited options.”
Operational evolution
Alicia Goya, ESG manager at AccorInvest also said that operational procedures needed to evolve moving forward, an area that AccorInvest is looking into as part of its commitment to achieve net zero, a commitment which saw it set a science-based emissions reduction target - validated by the Science Based Target Initiative (SBTI) - of minus 46 per cent absolute emissions by 2030 compared to 2019.
“We need to invest in people, we need to upskill all the teams and we need to train them to make sure that they are ready to face this transition that we are looking for. But it's not enough to train people because we really need to measure the outcomes of all the things that we do,” she said.
She added: “Building management systems are important but you won’t get the performance you need if your asset is not being operated as it should. So it’s not only investing in the building or just providing the right tools, it’s about helping employees learn how to use these tools.
Tiveus added that setting science-based targets is a step in the right direction as she noted that Pandox has also sent in its commitment to the SBTI.
“Science-based targets means we take the necessary steps such as phasing out gas, do more about building energy efficiency, implement green agreements with our tenants and also do more work when it comes to our materials when we construct, renovate etc,” she said.
However Schaffer said that while building management systems as they stand are a great tool, there’s a whole world of old hotels that don’t have the latest BMS technologies on site, which can be expensive. To deal with this, she advised that stakeholders put in more effort to find alternative solutions.
“There are companies with less expensive solutions which will allow you see what the problems are. There’s a lot of new tech out there and I’m seeing things now that would have been impossible to do two years ago. Venture companies are coming up with fascinating solutions that can help bring the older assets - which represent the majority of hotels – up to spec,” she said.
Challenged assets
For assets — especially in the UK — which look really challenged even though stakeholders are doing the best they can with the physical building, Patton said: “It’s really important for the industry to discuss and share best practices on how to improve those assets and make them more efficient because that's where there will be really big wins going forward.”
Expert also noted that while sustainability-linked loans have been an enabler in the journey to tackle ESG-related challenges, more now needs to be done.
“The lender and the bank's perspective is really important when it comes to driving change in executive management groups. The only thing I hope is that the discount will be bigger because it’s zero to 2.5 basis points when you're talking about sustainability linked loans up to a maximum of around 5 basis points. But we’re in real estate so that isn’t a lot of money in this industry. I hope that really there will be a development here to push us further,” Tiveus said.
Brand role
Investors also said that brands also have a role to play in the ESG discussion., especially as more than 40% of the rooms in Europe are branded.
“Brands are still working through what it means their estate and they’re obviously worried about obsolescence in some parts of it. There's no silver bullet here and it’s a complicated issue but I think the brands need to do a bit more in being able to get customers to understand why they should pay a premium for assets that are more sustainable and on a pathway than ones that aren't on one,” Penny said.
He added he has seen evidence that customers will pay more to stay in a hotel that’s aligned with their social values.
“We own some of those hotels and the way that we see those perform is better than we expected. And they’re outperforming because people feel a connection with that brand and will pay up for that. And so there's a massive opportunity there for hotel owners and the brands,” he said.
But it’s clear that all stakeholders in the hotel sector need to move fast because moving forward Schaffer warns that that in the near future, the majority of boards will decide to no longer have exposure to non-compliant assets.
“We’re already seeing this in Germany where you can only have so much of non-ESG compliant assets in your portfolio be it on the equity side or on the debt side. Over a five-year horizon, there will definitely be a lot of benefits from being ESG compliant as opposed to not being compliant,” Schaffer said.