BERLIN — Environmental, social and governance issues cover a wide swath of topics, and investors placing money in European hotel and hospitality projects are committed to compliance, despite a lack of universal standards of measurement.

A major driver is the European Commission’s European Green Deal, approved in 2020 as a set of policies designed to make the European Union climate-neutral by 2050. But hoteliers say ESG compliance is about addressing social topics as well as the environmental ones, and that the combination is a must for all levels of business.

But compliance for issues that range from carbon neutrality to fair labor practices requires a lot of education, data-gathering and investment, which the hotel investment industry is not taking lightly.

“The transition is mandatory. No one can avoid it, and happily, the hotel industry is getting together on alignment,” said Miguel Casas, managing director of Stoneweg Hospitality, a Geneva-based real estate investor. “This is a huge opportunity, and it’s integrated into our investment strategy. Future generations will want hotels that follow [these practices] and from a cost perspective, everyone is fully aligned.”

Speakers on an International Hotel Investment Forum panel on “Hospitality Investment with Purpose” acknowledged that while at first glance, many ESG topics seem to fit more under the umbrella of hotel operations, they must be fully integrated into all aspects of a hotel project, from acquisition to operations.

“It’s about what you own — the asset itself — but also what you do in the hotel operations,” Casas said. “We’re fully aligned with the operator. We do our part and commit to the physical and construction side, but then in the [hotel management agreement] we make the operator commit to good practices.”

While universal standards of measurement gauging environmental and social issue compliance don’t exist, hotel investors said that’s not an excuse to sit still. Gathering data is the first step, which makes analysis much easier.

“As an investor, we look at energy, carbon, water and waste KPIs — they’re important pillars of our strategy,” said Adrian Flück, director of asset management of hotels for Invesco. “Then we analyze the net-zero carbon impact, using carbon risk real estate monitoring tools, and we also look at the physical risks of the buildings.”

Gathering the data is part of “doing our homework,” Flück said, citing Invesco’s efforts to gauge carbon usage as an example.

“We gathered the data over the last 24 months, then we discuss in teams how the data makes sense,” he said. “Do we have to make bigger investments to stay below that net-zero carbon trajectory? The aim with our strategic investments is to keep them below that line — it’s our fiduciary duty to identify risks when we acquire [property]. We have the tools now to move things forward.”

Showing your work and establishing systems are key approaches to ESG compliance for real estate investors in particular, whose asset hold periods simply may not allow enough time to see full compliance to completion.

Casas said Stoneweg’s hold period typically is five to seven years.

“We’re investing now, so this decade is when this will be an important, mandatory matter, so we have to implement things now,” he said. “Or if we can’t implement, at least we can create the business plan and we have the metrics and underwriting of these things for the incoming investor.”

Not adhering to ESG practices does factor into a property’s profit-and-loss statement, he said. “And not adhering factors into underwriting and more investment strategies at this point. It’s becoming a factor in the valuation of operating real estate assets,” he added.

Timothy Abram, senior vice president of European acquisitions for Starwood Capital, said measuring return on investment in ESG practices is “a little bit of science and a little bit of art.”

While it’s fairly straightforward to calculate costs, payback and the usual metrics, Abram said the softer side of the equation involves looking into the future.

“We look forward five to seven years, to our exit,” he said. “We think who will buy this asset — usually it’s someone more institutional than ourselves — and we ask ourselves what their ESG requirements are, and we do those, too. It’s extra investment that’s not paid off today but we always do it because we want to create the most institutional assets. We don’t want someone to not buy this hotel in the future because it doesn’t meet their ESG requirements.”

Environmental issues may be the most straightforward to measure, but speakers agreed that the social elements of ESG are just as critical.

Gilles Clavie, CEO of AccorInvest, said his company's approach to improving social conditions for employees was made clear during the pandemic, and it requires just as much planning and investment as any other aspect of business.

“There’s the financial part — we had to raise renumeration because it just wasn’t fair in some situations,” he said. “We learned early on that housekeeping in our industry is the equivalent of nursing in the medical industry.”

Beyond wages, Clavie said investing time, effort and money into building programs to accommodate different types of workers is paying off.

“We had to look at working conditions, offering flexibility and family services, looking at all the jobs that are constraining, and realizing that many people don’t want those constraints,” he said. “All the elements [to address those] are quite easy to put in place. We have to engage in new leadership models, and we’ve make a lot of effort into programs for leadership.”

"ESG is a real business driver," he said.

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