Investors switch on Green light 

JW Marriott Maldives Resort & Spa
Marriott International has been driving green initiatives at its properties.

The sector realised that it could no longer ignore matters sustainable last year, as the work of Greta Thunberg and groups such as Extinction Rebellion bought the issue into the mainstream and kept it there. 

Investors in the hospitality have started to appreciate that there is an ROI to be had on sustainable assets, ensuring that, to stay in favour, operators must follow suit with their policies. 

Xenia zu Hohenlohe, managing partner, Considerate Group, told us: “Increasingly, investors are having more and more influence. ESG investment - environment and social governance investment - is becoming more important, particularly for owners of portfolios of buildings. If you have a real estate fund, they’re all increasingly looking to make them ESG compliant because their investors are demanding it.”

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The tide was turning, if not rising, with ESG money market funds seeing their assets under management grow 15% to $52bn during the first half of 2019, according to research from Fitch Ratings.

In December the ratings agency said that global banks were increasingly embedding ESG factors into their risk-management frameworks. More than half the 182 banks that took part in Fitch's ESG survey said they incorporated ESG considerations “always” or “most of the time” into most of their risk-management processes. 

The exception was asset pricing, where only 39% of banks considered ESG “always” or “most of the time”. However, this proportion was, Fitch said, likely to increase if governments introduced financial or regulatory incentives to channel funds into more environmentally-sound investments.

And there’s money to be made on the ground. Zu Hohenlohe, said: “It makes good business sense to act now – according to the latest research released by the Arabesque University of Oxford for the UN Global Compact, good ESG performance results in 90% lower cost of capital, 88% better operational performance and 7% higher return of equity.”

Rosa Brand, principal, real estate, KKR, told us: “Sustainability is a major topic for us, as it should be for everyone. We’re trying to be ahead of the pack; we have an elaborate ESG policy and every time that we look at an asset we look at how we can apply it so that the asset complies, but also so that we are thinking ahead. 

“We’re on the value-add opportunistic side, so what we try to do is buy an asset which isn’t suitable for a core investor yet and we look to develop it. Given the way the trends are going, from a business perspective it would be careless for us to fail to take that into account, you may have to pay more but this is the way that you get a good ROI.”

Was sustainability a factor in valuations? For Luc Boschmans, director, asset management, Archer Hotel Capital, not yet. He said: “When we look at hotels to buy, we would definitely see it as an upside, if there’s not much to be done, but would we pay a premium for a hotel with a specific BREEM rating? We’re not there yet. In the office space, yes. But if you tick all the boxes, it’s not something that a buyer could hold against you.” 

Boschmans found that the sustainability spirit was willing , but getting the message to operator level was harder. Boschmans said: “Our shareholders GIC and APG want us to play a very active role and we work a lot with our operating partners, like Marriott International. We have calls with them about sustainability, about waste, about water and this is not something we were doing three years ago, this is new. We need to work together, there should be no finger pointing, we are there to help them if investments are needed.

“As the owner we need to make them realise that it is important to us. The operators have targets, but they can get lost in translation when you ask the hotels how they are going to meet that goal, some GMs struggle in their hotels and we can help. 

“A lot of what we can do in hotels is to do with behavioural changes. As the owners we have to force the operators to work with their suppliers. When were refurbishing a hotel in Amsterdam we wanted a smaller rubbish compressor, because we wanted less waste. We told the hotel to talk to its suppliers and tell them that, for example, the fruit supplier has to take back the crate from the fruit delivery. And they have done.

“It can take time to react. We definitely support initiatives, even though we know there might be a cost, because it’s the planet. We’re not going to ask for an ROI on that.”

With a new issue coming into operations, where the buck stops has yet to be clarified. Zu Hohenlohe said: “Directives alone will not change anything and that’s where most hotel groups are totally off. They have consultants come in and give them these grand strategies and they give them to the hoteliers and say ‘deliver’. They will not get them implemented if you don’t report back on them, if they’re not in their KPI, if you don’t have a very regular and very coherent system.

“It should be given to Revenue and Operations, but usually they give it to the poor GM who is overwhelmed with it and that’s where companies go wrong, they don’t create a role. You need to have a sustainability officer within the company and they need to decide who needs to be responsible within the structure.”

Thomas Mielke, managing director, Aethos Consulting Group, added: “In the not-too-distant past, organisations have just paid lip-service to sustainability by relegating this topic to the internal marketing or PR departments. The general public has called them out on this. 

“So organisations have significantly ramped-up their efforts to drive real transformative change. The problem is they frequently get too focused on buying new technology or systems and developing advanced policies and best practices. They fail to properly ingrain those new guidelines and behaviours within their organisation and often do not align their human resources strategy with those new business targets and goals. 

“One key factor to consider here is that there needs to be some sort of control mechanism in place – after all, irrespective of the level of awareness for sustainability initiatives, real transformative change can only happen if organisations have eliminated any form of uncertainty around it. So, having a point person or sustainability champion is mission critical when wanting to drive such systemic change management agenda. 

“Another big topic which many organisations fail to tackle appropriately is the alignment of the sustainability targets with individual and departmental goals. More often than not the latter are tied to commercial targets – thus promoting short-term financial thinking. Instead, organisations should embrace a check-and-balance approach where individual bonus and performance programmes also include sustainability milestones. Doing so would make it much more likely for companies to get everyone within their organisation to support, and embrace, the sustainability initiatives.”

Helping to motivate the sector were ratings systems such as GRESB, which allowed organisations to measure themselves against their peer group, fostering healthy competition. But, said Brand: “The hospitality sector is struggling in terms of having a forum to exchange thoughts and ideas and come up with a framework.”

This year’s IHIF will see the launch of a Sustainability Council to identify the key areas in which the hospitality real estate sector needs to address sustainability concerns and to provide guidelines on how investors, developers, operators and all key stakeholders can commit to more sustainable practices. We hope to see you all there. 

https://ihif.com/news/ihif-2020-launches-sustainability-council-to-unite-and-lead

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