EU: The Capital Markets Committee of the Energy & Environment Alliance (EEA) has published the first in a series of reports, which explores the value of ESG to hospitality investors.
Among ESG considerations, energy efficiency currently ranks highest for hospitality investors. This has been attributed to the rises in energy prices and the ability to lower operational costs.
While energy efficiency trumps environmental concerns, investors are also starting to assess social sustainability aspects, particularly as they relate to the labour-intensive nature of the hospitality sector.
Buyers are increasingly evaluating hotels’ ESG credentials and are seeking to understand potential impacts on exit valuations. Institutional investors are leading the shift.
The ESG considerations by investor group include:
• Institutional investors and funds – Extensive ESG due diligence in line with EU Taxonomy and the Sustainable Finance Disclosure Regulation (SFDR); CapEx planning to meet EPC standards; preference and requirement for green lease clauses in newer buildings. Biodiversity considerations are also now coming into play. Many of these groups are conducting net zero carbon audits of the assets in their portfolios.
• Owner-operators – Prioritise energy efficiency, social aspects, staff retention, and community integration. ESG considerations are increasing in areas directly connected to CSRD reporting requirements and the Climate and Sustainability Reporting requirements, which will be required from January 2025, under the International Financial Reporting Standards (IFRS) and International Sustainability Standards Board (ISSB).
• HNWIs and family offices – Holistic asset efficiency improvements; focus on social aspects; a strong compliance focus on EPCs. The emphasis on ESG varies significantly among this group, with some considered to be real forward-thinkers and others lagging behind. However, groups investing in larger hotels and portfolios, and/or those backed by larger investors are generally much more focussed on ESG.
There are concerns over refinancing risks if ESG standards are not met, with obsolete assets becoming un-financeable in the future. There is early evidence of some lenders asking for minimum EPC standards or certification as a prerequisite for refinance.
Green bonds and sustainability-linked loans are also emerging as key financial instruments, with banks demanding ESG performance tracking.
Rekha Toora, chair of the EEA Capital Markets Committee, said: “It is clear that there is a shift in investor attitudes and a massive interest in what the next buyer may be looking for—not just from investors but also from operators and brands. We must all play a role in collaboration and sharing of knowledge so that we can continue to progress, minimising asset obsolescence, liquidity risk and potentially to achieve green premiums as the market evolves.”
Ufi Ibrahim, CEO of the EEA, added: “One of the most substantive changes taking place is the historic collaboration of Securities and Markets Authorities from 130 countries around the world to create uniform sustainability reporting standards. The direction of travel is towards audit-grade sustainability disclosure of information that is financially material to investors and organisations. The tsunami seems to have reached an unstoppable point and it’s therefore critical that senior executives in the hospitality industry are upskilled and prepared for the new rules of doing business.”
To read the full report How Important is ESG to Hospitality Investors, click here.
