ESG news & developments impacting Hotel Funds

The challenges and opportunities in adapting an ESG Strategy for Hotel Funds

It would be difficult to have missed the buzz around ESG strategies which has been heating up the financial markets worldwide.

No company that answers to shareholders is able to escape this aspect of business management and reporting any longer - but it is also important to recognise that there is no quick fix to ESG reporting. It cannot be simply developed and applied within a few months, and then be ticked off the list to move on to other things.

A hasty and imperfect approach to ESG will end up being detrimental to both the companies concerned, and the planet. And as importantly, will almost certainly come back to bite management, taking up incremental time and resources, within a few years.

For those funds focused on Hotel Real Estate, which is where our expertise at Considerate Group lies, we would like to lay out some opportunities when addressing ESG at both fund and ultimately at operational level.

This newsletter aims to give an overview of the market, and includes reports and articles highlighting the direction of travel, as well as examples of what effective ESG leadership looks like.

Some key recent highlights include:

1. Demand from guests and travellers

58% of consumers say they are thinking more about sustainability now than before COVID-19 (source: Financial Times)

70% of global travellers say they would be more likely to book accommodation knowing it was eco-friendly, whether they were looking for a sustainable stay or not. (source: Booking.com)

2. Market and Investment trends

Global ESG assets are on track to exceed US$53tn by 2025, representing more than a third of the US$140.5tn in projected total assets under management, driven by a perfect storm created by the pandemic and the green recovery in the US, the EU and China (source: Bloomberg 2021)

Sustainable funds accounted for almost a third of overall European fund inflows in the second quarter of 2020. Flows into sustainable funds climbed 72% to US$71.1bn in Q220, while AUM reached record levels of over US$1tn (Morningstar, Global Sustainable Fund Flows)

3. ESG accounting and reporting standards moving towards more alignment and integration

Good news for those who lament that efforts to measure ESG have created an alphabet soup. The World Economic Forum’s International Business Council agreed last January to work with the Big Four accounting firms, to create 21 metrics by which to chart progress towards a more stakeholder-driven form of capitalism.

Given the current “fragmented, chaotic and confusing” landscape of standards, which makes it impossible to compare companies’ sustainability profiles, standards for measuring sustainability performance is much needed.

Hotel Certifications are also increasingly being aligned to global reporting frameworks - such as GRESB recognising Green Key. (see our section below on reporting)

4. EU Green Taxonomy

The EU Green Taxonomy came in to force last Summer. Designed to be the world’s first classification system for green financial products, it establishes science-based criteria on how companies define what counts as truly sustainable economic activity. Disclosing companies who operate within the criteria receive increased tax benefits and enhance their sustainable reputation.

5. BIDEN Administration’s focus on Climate Policies and building a Green Economy

On top of his US$1.9tn Corona relief package, President Biden is determined to have a Climate Bill passed by Congress - as well as approving a US$1.2bn in funding for the Green Climate Fund, a multilateral institution that provides grants and loans to climate projects in developing countries, partially fulfilling the US’s original US$3bn pledge to the GCF. Climate is not just back on the US agenda but at the forefront of many of the new bills being proposed.

6. Net Zero Asset Managers Initiative

Launched in December 2020, the Net Zero Asset Managers Initiative is a group of international asset managers committed to supporting the goal of net zero greenhouse gas emissions by 2050 or sooner. 73 signatories have so far publicly agreed to the Net Zero Asset Managers Commitment, to help deliver the goals of the Paris Agreement.

7. COP26

Postponed from 2020 due to the pandemic, COP26 is now scheduled to take place in Glasgow in November 2021 under the presidency of the UK. There are five priority areas for discussion at the event this year: 1) adaptation and resilience, 2) nature, 3) transition to renewable energy, 4) accelerating the move to zero-carbon road transport, and underpinning all of these is 5) finance. The objective is for every professional financial decision to take climate change into account. The right framework for reporting, risk management and returns will embed these considerations and help finance a whole economy transition. To achieve net zero, every company, bank, insurer and investor will need to adjust their business models for a low carbon world.

Sustainability in the UK hospitality sector

Considerate was interviewed by Credit Suisse in Q4 2020 to provide insight into a report on sustainability in the UK hospitality sector. The report was focused on three UK and European hotel groups; however the key messages were of universal relevance: 1) the financial markets are starting to find ways to embed sustainability alongside purely financial metrics; 2) investors are increasingly holding companies and their management to account for ESG as part of a more holistic approach to investment. Following the election of Joe Biden to the US Presidency, the pace of change continues to step up.

Other key take-aways from the report

Credit Suisse expects sustainability to become an increasingly important differentiator for hotel groups, driven by customers. Hotel groups are establishing science-based emission reduction targets for 2030 with asset owners able to control their strategy, whereas asset-light operators face the potential difficulties of convincing asset owners to invest. Credit Suisse would encourage the inclusion of sustainability criteria in executive compensation to hold management’s feet to the fire and demonstrate their commitment to achieving carbon reduction targets.

The report also highlighted that mainstream hotels are broadly more emissions-friendly than luxury hotels (on average across the sample, 3* hotels operated 4-5 times more efficiently than 4*/5* brands). Specifically looking at luxury hotels, there is a factor of six between the most and the least efficient upscale hotels. But despite this, sustainable upscale hotels can perform as well or better than mainstream brands.

Considerate at LCAW 21

London Climate Action Week (LCAW) is an annual event bringing together London’s climate professionals and communities to find solutions to climate change. It was forged to bring individuals and organisations together to enhance collaboration and create an ambitious and active London “climate cluster”.

For the 2nd year running, LCAW will be a virtual event, with a range of panel discussions, campaigns and announcements scheduled to happen between 26 June – 4 July 2021.

Considerate will be hosting its own session as part of the broader event, focused on science-driven sustainability in the hospitality sector. We will be confirming the precise timing of the panel session, along with panel participants, closer to the date. Do get in touch if you would like to be involved in our session.

Case study: ESG framework for an international hotels fund

The Fund recognises that it has an important part to play in shaping the future and has been developing its sustainability credentials since the 1990’s. A focus on doing the right thing (for its clients, its people, and wider society) lies at the centre of the Fund’s culture, with a commitment to deliver positive outcomes for all; creating a better future by investing responsibly for its clients.

The Fund is committed to integrating ESG strategies across 100% of its investment teams. With a bespoke sustainability programme, its approach to ensuring this commitment to sustainability is embedded within its hotel asset portfolio.

Read the full case study here

Reporting

GRESB has become the leading ESG benchmark for real estate and infrastructure investments across the world. There is a wide variety of data to be compiled and submitted for assessment during the reporting period from April - June. The GRESB score is widely accepted as the pre-eminent indicator of sustainability practices within the space, thereby making data accuracy, completeness, integrity and timeliness important elements - not only to meet the submission deadlines but also to maximise a portfolio’s final score and placing amongst its peers. Last year Considerate added a GRESB calculator to the Con-Serve™ sustainability data monitoring system, which facilitates this process. GRESB recently agreed to formally recognise Green Key International as a Tier 1 certification for all GRESB participants.

Adhering to global frameworks and reporting standards remains important. Considerate has submitted advanced stage UN Global Compact Reports for longstanding clients the Oetker Collection, for the past three years, and are now working on their latest report for 2020.