Carrots, sticks and the reality about the lending ‘greenium’

The financial incentives in terms of a so-called ‘greenium’ in rates when seeking lending have yet to make a significant financial difference in the hotel industry, but a mixture of government and standards-led incentives plus increased scrutiny is likely to change the picture.

While investors are increasingly concerned about ensuring that they do not back schemes which become stranded assets in the future because of poor energy performance, currently it appears to be higher levels of liquidity that is the main incentive for developers looking to access finance.

“Over the last seven of eight years a number of international bodies have created green financing framework principles that support businesses in lending in a sustainable way,” says DLA Piper Partner Toby Barker.

“Generally the margin last year was around 7.5bps to 10bps on average for more sustainable projects. The biggest range we’re seeing is 7.5-20 bps. So it’s not a huge sum of money,” he concedes. “There is no standardisation in the market, far from it. But from the lender’s perspective, there has to be a sustainable element to it to make it attractive.”The types of lending that are benchmarked against more sustainable development approaches can broadly be split into two categories, he says.

Green financing refers to money that is lent for a specific green project, which usually means developing or refitting buildings in more energy efficient ways.

Sustainability linked loans are broader than the building performance and tend to focus on corporates and owner investors, supporting their longer term sustainability strategies.

“It’s a focus on the whole ESG,” he adds.

Carrot and stick approach

In terms of encouraging change within the hotel sector, Pro-invest Group Managing Director, Europe, Alex Garrod says that the company has seen both the carrot and the stick being used in Australia and New Zealand, where it has been an active investor, developer and operator.

“There are significant tax breaks for achieving certain levels of environmental performance and we are seeing the government putting funds into the equity side as well. That also comes with quite a significant commitment to put the infrastructure in place,” he says. “In Europe, we’re not having any discussions with lenders that don’t include an ESG component.”

While he is yet to see a pricing advantage on green projects, he says that it has created a “liquidity premium, which is very valuable”.

He adds: “It feels to me like the stick is getting heavier. The reporting environment around ESG means we are seeing an increasing integration of financial and non-financial elements when companies report. I don’t know how well prepared all of us are for that.”

In terms of institutional and bank lending, CaixaBank Managing Director Hospitality, David Rico Gardia, believes there is a lack of uniformity across companies and countries and believes things are being dealt with by banks in countries in a different way.

Because its investors apply lower costs for green and sustainable lending, he says the bank passes this on fully when it lends, meaning its green bonds and sustainable bonds do provide a lending greenium.

“We do it because we are accessing our financing cheaper and transfer that into the loans we provide. We do not take any of the difference, we pass it to the customer,” he stresses.

When considering lending criteria, he believes that the industry is still at the starting point of a transition.

“For us within our department part of the credit process is not just the economics but the ESG [about considering a loan]. There are some sectors which are more contaminating than hospitality and we are putting the focus on those and they are having a harder time in achieving approvals,” he says. “Eventually it will come to the real estate industries. Maybe three or five years from now where it will become a yes or no in terms of ESG approval.”

Marketplace ESG ignorance

Archer Hotel Capital Managing Director Dominic Seyrling adds that away from the banking sector, there remains a “large degree of ignorance” in the lending environment and reflects that in terms of private placements, for the company it would seek a sustainability linked loan but says that the firm has not completed many and that so far “there are no obvious benefits for us.”

However, he welcomes more progressive lending and stresses: “It should be about equity and debt because if we are not meeting ESG goals we won’t be getting equity. Everyone needs to look at themselves and ask ‘what can we do?’”

Another key factor is whether the combination of three core themes – the environmental, social and governance – under the ESG umbrella is still fit for purpose.

Seyrling disputes whether a high achievement or accreditation level in one of those three core elements should have a knock-on positive influence on how a developer or operator is viewed across the other categories.

“For example, if I am really nice to my staff should that count positively towards my environmental score? I would say that the E, S and G should be separated. It needs to be broken up and looked at separately, just the environmental element on its own is such a big topic that can be tackled from so many different directions. We should break up the three letters,” he says.

However, Garrod feels that the three strands of ESG are not mutually exclusive and while he accepts that each is different, he believes an integrated approach is preferable.

“We do place huge importance across all three elements. As a company we are vertically integrated as investors, developers and operators, and that allows us to get the heads of each of those divisions of our business together and design and implement a process for each new project,” he says. “I wouldn’t want an obsession with one element at the expense of the others.”

Rico Gardia adds that so far institutional money has been channelled mostly “towards the E”, although the Spanish bank has issued social bonds.“I am not aware of governance lending. As of today the reason that the E and the S are ahead is because the money is going into those,” he says.

All those quoted in the article appeared on stage at the International Hospitality Investment Forum (IHIF) held in Berlin between May 15 and 17, in a session called - Green Finance Under Scrutiny: Assessing the Requirements, Benefits and Potential Hurdles