Measuring sustainability in hotel assets

Our hospitality and leisure team (represented by Susan Samuel, a real estate partner at DLA Piper) recently hosted a webinar on the topic of measuring sustainability in relation to hotel assets, with Ufi Ibrahim, CEO of the Energy and Environmental Alliance (or the EEA), a nonprofit coalition of hospitality sector leaders focussed on sustainability; and James Fisher of the BRE Group, the group behind BREEAM, the world’s leading sustainability assessment method for buildings.

Here are the key takeaways from our webinar:

• Ufi Ibrahim outlined four key reasons why sustainability should be high on the agenda of boards of hospitality businesses now:

Regulation

Sustainability came to the fore after Agenda 21, a non-binding resolution by the United Nations (UN) was enacted in 1992 to promote sustainable development. Since 1992, sustainability has moved from something non-binding to being binding as an absolute requirement for businesses. The Paris Agreement 2015, a legally binding international treaty on climate change, introduced a goal of limiting global warming to 1.5°C. The UK was the first G7 country to legislate for net zero emissions. New legislation is emerging and the trickle down effects of those regulations will start to affect a much broader range of business, including the fund and corporate reporting requirements set out by SFDR and NFRD 2021, for EU fund managers to disclose Environmental, Social, and Governance (ESG) objective of products. In time, buildings that do not fall within sustainability criteria may become “stranded assets.”

Access to capital

Fund managers are carrying out very strict net zero due diligence audits of their portfolios. Assets are being assessed rigorously for viability and longevity and assessments of how much capital expenditure is required to make an asset compliant with existing and forthcoming regulation are being carried out. All of this is feeding in to the decisions that investors and lenders are making. If hospitality businesses do not act now, it will affect their access to capital in the future which, as we have seen throughout COVID-19, has been the lifeblood for so many businesses.

Competitive differentiation and customer proposition

Differentiation and competitiveness is moving towards businesses that have strong ESG credentials. Those that do not are likely to see reductions in their occupancy rates and revenue per available room (RevPAR). Green hotel certifications such as Green Key, Green Globe and Earth Check are driving customer demand. The hospitality industry is also facing huge staff shortages following Brexit and COVID-19. Strong ESG credentials will also help attract and retain the best talent, and hotel businesses must adopt that as a competitive advantage.

The 2021 United Nations Climate Change Conference (COP26)

COP26 meets in Glasgow in November, and more regulation is expected to follow to help achieve the UN’s climate change targets. There is also likely to be an acceleration in the number of scientific reports that are published showing the current extent of the climate change emergency. Public pressure on all businesses to act and to be accountable for their actions will mount.

• The panel discussed the different perspectives of operators, owners and funders of hospitality businesses in relation to ESG. Finding solutions, alignment and collaboration between the various stakeholders is fundamental:
  • There is a correlation between the BREEAM rating of commercial buildings and the amount of rent that can be charged to tenants of those buildings. For example, a building with a top score, the outstanding rating, which is about 1% of the certifications that the BREEAM rating team carry out, may achieve a rental increase of 12.3%.
  • We are seeing growth in sustainable hotel investment and development, with funds employing ESG teams and including ESG checklists as part of their own investment committee processes.
  • Sustainable methods can lead to significant cost savings, and here there is alignment with operators – for example, operators who adopt sustainable operating practices (including self-check-in systems, turning off lights in empty rooms and exchanging single portion shampoo bottles with refillable bottles) can benefit from cost savings.
  • OTAs are looking to display the eco-credentials of hotels, with a view to attracting guests seeking hotels with sustainable operations.
  • Green bonds and green loans are increasingly coming into the market, tying finance terms to ESG improvements.
• Finally the panel discussed the problem of measuring how sustainable a hotel asset is. As 24/7 operational businesses, hotels are intensive users of electricity and water, creating carbon emissions. The EEA and the BRE Group are working together to help tailor the existing BREEAM rating system so it can be applied to measure sustainability of hotel assets, in what would be the world’s first for the sector. The idea is that the method of measurement is for the industry by the industry and will create consistency in metrics, set global formal standards and create pathways to net zero. It will help provide the industry with the ESG governance framework it needs with consistency, transparency and objectivity around data generation, collection and reporting and ensuring 100% compliance with regulation.