Why hotel industry must get sustainability right

Demonstrating dedicated knowledge of and compliance with environmental, social and governance (ESG) and sustainability considerations has created opportunities and challenges specific to the hospitality sector in recent years.

Failing to create a resilient hotel sector and take operational, market-related and reputational risks into account will likely lead to impacts such as property damage, loss of value and reduced appeal to investors.

CBRE Econometric Advisors' March 2023 analysis of carbon dioxide emissions data highlighted the urgent need for hotels to lower their carbon footprint relative to other real-estate asset classes. 

There are two key risks from climate change that could directly affect the resilience and appeal of the sector.

• Physical: reflecting the risk to value of hotels affected by climate change. In accordance with VPGA 8 of the RICS Valuation – Global Standards (Red Book Global Standards), valuers must investigate any relevant climate-related data, such as flood risk assessments, risk of exposure to storms that could lead to property damage and devaluation of a hotel.
• Critical: this includes operational risks that can affect costs and margins in the sector, market-related risks – where the sector does not keep abreast with the evolving expectations of owners and guests – and reputational risks that could negatively affect a hotel's value. 

Some hotel operators, responsible owners and investors have set a framework of policies and practices addressing the entire value chain and life cycle of operations to improve their hotels' sustainability performance. 

The definition of sustainable hospitality has to be recognised as the main pillar in the value chain and life cycle of a hotel's operation. This will require identifying those areas which prevent the sector from achieving sustainability standards in environmental, economic and social dimensions. 

Nonetheless, all decisions relating to achieving a sustainable hospitality sector need to benefit the environment, society and the sector's operational profitability. 

Guest, employee and investor expectations have led the sector to redirect its focus and resources towards decarbonising initiatives, sound environmental stewardship and social well-being. The rise of environmental concerns and intensified capital requirements throughout the hotel life cycle are expected to increase the need to transform current practices.

Hospitality stakeholders will therefore need to develop mid- to long-term ESG and sustainability strategies to ensure asset resilience and meet these targets. 

Since July 2020, EU Regulation 2020/852 – also known as the EU Taxonomy – has been in force to determine whether an economic activity ­as well as fund and investment management more specifically is environmentally sustainable, to prevent investors and lenders from greenwashing.

This has enabled stakeholders in the hospitality sector to identify clearly how their own key performance indicators correspond or align with one or more ESG reporting criteria.

The lack of consistent regulatory reporting standards at a global level has contributed to the formation of global reporting initiatives (GRI) and other standards, namely the European Financial Reporting Advisory Group (EFRAG) and the International Sustainability Standards Board (ISSB). 

While hotel-specific environmental and sustainability objectives are expected to continue evolving, the Hospitality Financial and Technology Professionals (HFTP) association has recognised the increasing explicit reporting requirements for stakeholders in the sector. 

This has led to the most recent revision of the Uniform System of Accounts for the Lodging Industry (USALI), which is expected to serve as a global reporting benchmark for hotels.

While HFTP is due to publish the 12th edition of USALI in May 2024, with an effective date of January 2026, that is not to say that stakeholders could not already make advancements on accurately monitoring and recording all components necessary to understand their individual environmental impact, by explicitly tracking their hotel's energy, water and waste consumption.

Once adopted, the 12th edition is expected to introduce another global, standardised tool for operational and profit and loss reporting, to help hotels of all sizes identify sustainability initiatives that can reduce their utilities consumption and carbon footprint.

Another sector-specific challenge is the traditional hotel investment approach, which focuses mostly on optimising the performance and worth of individual properties. There is a degree of urgency among all stakeholders for closer collaboration to prioritise the environmental, social and human capital.

Moreover, the sector has in the past been characterised by short-termism, with each investor seeking to dispose of assets at optimal sale prices typically three to five years after acquisition.

This prevents every new, opportunistic owner from adopting a long-term approach focusing on stewardship. It also increases the risk of owning or operating a stranded asset – that is, one that fails to keep pace with regulation on environmental performance – because the priority has been to resell at optimum value, rather than retrofit.

It has therefore become essential for hoteliers to assess the physical and transitional risks associated with their assets. This includes identifying any factors that could affect the value of hotels as a result of regulations or changing market expectations.

Nonetheless, sectoral sustainability and ESG experts such as the Carbon Risk Real Estate Monitor (CRREM) can help navigate and assess these risks for hotels. Such experts offer science-based carbon reduction pathways at a property-specific and a wider corporate level, while also providing tools to assess financial risk and manage carbon mitigation strategies in a cost-effective way. 

The same research found that the top five motivators in the same context are:

• potential cost savings
• improving image
• acquiring competitive advantage
• doing something positive
• enhanced employee morale.

Reflecting the current macroeconomic outlook, high inflation and borrowing costs, given current constraints on profitability and capital, the factors listed above present hoteliers with a dilemma about whether to invest money now to save money in the longer term.

Overall, hotels with a dedicated ESG and sustainability agenda are able to demonstrate operational efficiencies, improve profitability and minimise reputational risk.

Those that are still lacking such commitments are likely to be perceived as riskier investments – and incur higher costs for finance.

Improving access to hospitality-specific ESG data and consistent benchmarking are expected to help understand the wider impact on hotel value.

As a result, hospitality stakeholders are increasingly evaluating the impact of sustainability initiatives on their earnings and yield.

CBRE surveyed more than 500 commercial real estate professionals worldwide and published the findings in February 2023.

Table 1 demonstrates how environmental building features affect commercial real-estate transactions. 

The table illustrates that commercial buildings with green features are more resilient given evolving market conditions and likely future sustainability requirements. Nonetheless, data for hotels and how green building certifications drive premium value remains a challenge.

Reflecting the increasing climate risk, it is paramount that we strive to achieve a sustainable hotel sector. 

As real estate and hospitality representatives, it has never been of greater significance for us to lead by example and strive to create a sector with a broader definition of value.