MADRID — Environmental, social and governance initiatives remain a priority for global hotel companies.
This is especially true for hotel owners who are investing in sustainability in their properties now in hopes of seeing a major return years down the road when they're ready to sell.
During a panel at the recent Atlantic Ocean Hotel Investors’ Summit on the topic, hotel executives discussed how to make the math work with ESG investments. Access to debt, obtaining insurance and better supply chain and operational pricing will be key to a hotel having the correct climate-change and net-zero underwriting and policies.
Carbon offsetting and carbon credits are tools that can be used, but they should be deemed as last resorts, panelists said.
Rogerio Basso, head of tourism at IDB Invest, said prioritizing environmental strategy is already embraced by many hotel companies.
“Net zero has [capital expenditure] implications, and to the bottom line. It is now a subset of investment, but the sense of urgency is different in different geographies,” he said.
A priority investment
Richard Nottage, president of Société Hôtelière Paris Les Halles, said in Europe ESG ideas are higher up the agenda that in some other markets, notably the U.S. He urged hotel owners to stay informed of environmental legislation being considered and approved by the European Union, and better yet, operate out in front of any new climate policy.
“[Coverage] is now needed. 2028 is when [change] gets serious, and 2030 is when it becomes costly,” Nottage said. “There will be forced movement, and then the construction companies will be fully booked. Those who wake up late might not need to bother getting out of bed.”
Is any one hotel company or hotel owner leading the charge in ESG?
“No one,” said Guy Pasley-Tyler, co-CEO of Archer Hotel Capital. “The ownership base is so fragmented in the hotel industry. Everyone has different horizon, angles, timelines. We are three and a half years into our [net-zero] journey, but by that time private equity is already thinking of selling. Marriott has 9,000-plus hotels and maybe owns five, so they have less power.”
The other stick is guests’ requirements and political thinking. Basso said there are hotel guests ready to pay a premium on a hotel that has gotten sustainability right.
“Markets are more aware, and customers demand it,” said James Bray, head of sales and market development at PNZ Group. “Not complying increases risk from lenders and investors on asset prices. Yes, there are many obstacles — decarbonizing is expensive— but it is critical to build strategy around emissions.”
In the years ahead, ESG will be a factor in hotel deal negotiations, said Philippe Rossini, portfolio manager of hospitality at Swiss Life Asset Managers.
“If your [capital expenditure] plan does not integrate carbon by 2050, then your hotel will be subject to a discount,” Rossini said.
Could hotels without ESG be at a disadvantage and be less attractive to potential investors in the future? A hotel's valuation might plummet without a plan in place, said Adrian Flück, director of hotel investment management for Europe at Invesco Real Estate.
“We can underwrite ESG to make a hotel buyable. … Brokers are getting very savvy as to the discounts and liquidity of hotels,” Flück said. “On this panel, there might be some of the more motivated [hoteliers]. It is divisive area. There are owners waiting to set off the oil fires in the U.S., and ones that are more socially conscious.”
Pasley-Tyler said Archer Hotel Capital is continually reworking its ESG strategy.
“We’re trying to get the basics in place. We hired two [staff] focused on sustainability to get the data right, the integrity. That has given us a road map for each asset and to focus on the ones that can bring the best returns in the first phase,” he said,
Archer owns 15 hotels around Western Europe, all with an urban focus.
“It takes between three to four months per hotel to do a full assessment, and the hotel teams themselves need to be engaged,” he added.
Beware greenwashing
The EU and some members states — notably Germany and France — are putting in place laws that outlaw greenwashing, the practice of claiming sustainability successes without doing the work.
A point of emphasis in greenwashing law is carbon offsets. Carbon offsetting is the process of customers paying for “get out of jail free” cards for a business to offset its own carbon emissions by investing those dollars in green initiatives, such as reforestation, waste management or renewable energy sources. Hospitality and travel companies often partner with third-party companies and organizations to offer carbon offsets for things such as airline miles and hotel room nights booked, for instance.
“Carbon credits are responsible for accusations of greenwashing,” Basso said. “It is best to use credits where carbon cannot be removed. We must all do our homework to make sure when you buy those cheaper credits, they do not return to bite you.”
Changing mindsets is perhaps the biggest step in the overall net-zero campaign, Nottage said.
“It’s a long path to get teams to understand what it is you are doing, and then it is the details: the CO2 you need to get rid of; the napkins that contain 22% polyurethane; the change and expense of changing from gas to electric; the new transformers needed in buildings; is the local grid powerful enough — it is huge,” he said. “Electricity is complicated. There are other sources. I am looking to invest in a wind-energy farm.”
Pasley-Tyler said hoteliers must understand the difference between offsetting and carbon credits.
“Our business plan is to implement as much as we can and use carbon credits as a last resort,” he said.
Two problems are the definition of net zero often changes, and producing one’s own energy in an urban center often is not easy, Pasley-Tyler said.
There are uses for credits as part of a company's net-zero plan, such as using them to take carbon dioxide out of the air or to benefit social communities while at the same time helping hotel’s or hotel firm’s messaging.
Fortunately the major hotel companies are staying active in ESG, Nottage said.
“Accor is encouraging franchise owners green key [certification] or equivalent by the end of this year. I understand that last year only 59% were,” he said.
As long as hotels remain attractive investments going forward, owners will be encouraged to spend on ESG initiatives to generate a greater return when they're ready to sell.
But as with any real estate asset class, there's always room for unknowns.
“More politics, more bureaucracy and there will be a lot more acronyms coming our way,” Pasley-Tyler said.
Collecting data on the success of ESG initiatives is a major step for widespread adoption in the hotel business, Flück said.
“We all need 100% of the data. There must be a system of red flags, minimum standards and being best-in-class to give every team the tools to advance the assets. But I am now finding partners to be open, a change from, say, five years ago,” Flück said.
He added that Invesco has several hybrid lease agreements that permit joint-venture partners to all benefit from the bottom line and regain some of the investment.
“Tenant-landlord terms are getting better [in this area of agreements],” Rossini added.