Investors look for green shoots

Savvy hotel investors are starting to tap into the potential of green funding, to help drive forward investment in greener operations.  

The opportunity is set to increase in scale, as environmental, social and governance (ESG) rises up the agenda in the minds of investors, from funds to direct shareholders.  

And the hotel sector has plenty of investment to make in greening its operations. A recent webinar led by the Energy & Environment Alliance drew attention to the fact that the hotel sector is one of the few business sectors to have actually increased its carbon intensity in recent years, running against a trend that has seen the UK at large halve its energy intensity over 30 years.  

The momentum, driven by investor demand, is clear – ESG funds are massively growing in scale. According to data from Calastone, ESG fund inflows have increased 37-fold over the last three years. And tesearch by Deloitte suggests that ESG mandated assets under management are likely to make up as much as 50% of all managed assets in the US by 2025.  

Among mainstream banks, HSBC has been one of the leaders, launching its first green bonds in 2015, which raised EUR500m for investment in relevant projects. David Stephens, head of real estate finance at HSBC, noted that in the hotel sector, its GBP175m loan to Edwardian for redevelopment of The Londoner in Leicester Square was the first in the sector to meet Green Loan principles. As a condition of the loan, the new building had to meet BREEAM Excellent standards, indicating a high energy efficiency in operation, and the use of lower carbon materials in construction.  

Julia Kochetygova, head of EMEA stewardship at investor Northern Trust Asset Management, said that the level of ESG disclosure in the real estate sector is quite low, but improving year on year. She encouraged companies to be proactive: “It’s better leadership to put forward a climate change plan, than be forced to by shareholders or regulators.”  

At consultants EY, Giles Barling, director of capital and debt advisory told Hotel Analyst: “ESG is a massive issue – in a good way,” that is increasingly taxing corporate minds, across future operations as well as fundraising.  

One hotel group leading the charge is Whitbread, which in February 2021 raised GBP550m with an issue of two tranches of green bonds. A GBP300m tranche with 2.375% coupon runs to 2027, while longer dated GBP250m bonds running to 2031 pay 3.0%. The bonds were set up under principles established by the International Capital Market Association, whose guidelines were published in 2018.  

“It was a very interesting process”, said Chris Vaughan, general counsel and sustainability lead at Whitbread. Meetings with institutional investors revealed a depth of knowledge and interest – and some tough questioning. “It’s only in the last three or four years it has become more popular with shareholders.”  

The offer was oversubscribed eight times, enabling some tighter pricing that, it is estimated, produced a 10 basis points advantage over other, non-green bonds. That equates to a helpful GBP0.5m a year saving.  

Vaughan said that Whitbread’s broad ESG agenda runs across three strands, covering people (both staff and guests); communities, addressing such issues as healthier eating; and environmental, from eliminating single use plastic to food waste. 

The company has committed to using the funds from the green bonds on specific investments within the group, to support greener construction of its hotels, greater energy efficiency in operations, and in sustainable procurement. Expenditure is sanctioned by a dedicated internal committee, with key metrics that items can be measured against; for example, new hotels must meet recognised BREEAM, LEED or EPC standards to be eligible for funds.  

Among initiatives already under way are a recent announcement to install electric vehicle chargers at most of the group’s hotels. Solar energy capture takes place on the roofs of around 20% of Premier Inn hotels, while the company has also experimented with battery storage, to time shift energy purchase.  

Vaughan said that while the ICMA’s off-the-shelf solution to structure green financial instruments was a generic one that took some working around to fit the hotel sector, the overall green bond financing route had been positive – and one Whitbread would be prepared to visit again in future.  

HA Perspective [by Andrew Sangster]: Historically, the focus for ESG in the hospitality sector has revolved around the consumer. But as can be seen in our report, the financing side of the business has been taking big strides lately too. 

For professional investors, ESG is an increasingly important part of their mandate. Pension funds, insurance companies, banks and other debt providers are explicitly asking for ESG information. Private equity takes it seriously too, not the least because much of their money comes from the same pension funds. 

The focus from finance on ESG presents operators and investors with new challenges. The consumer angle was mainly about marketing. Finance professionals are demanding a more rigorous and comprehensive set of reporting.  

Measuring and managing ESG has increased in importance. Both the measuring and the managing still need improvement and a third “m”, moderation, remains the watchword for ESG activity by corporates until these areas are improved. 

Being moderate is not doing nothing. The careful and considered work by corporates like Whitbread shows that done well, ESG delivers returns for all stakeholders including shareholders.  

The focus has not entirely switched away from consumers, however. A new study from Peter O’Connor (a contributing editor to Hotel Analyst and professor at the University of South Australia business school) and Guy Assaker (an associate professor at the Lebanese American University) published last month showed how Covid had raised awareness among consumers about environmental issues. 

For consumers, it is communication and commitment that matters the most. And it has moved beyond tent cards in bathrooms offering guests the chance to reuse their towels. But like tent cards, a few basic steps can go a long way – digitising documents, switching to recyclable and recycled products, reducing energy consumption and so forth. 

The study by O’Connor and Assaker showed that consumers are prepared to make economic sacrifices (pay higher prices) to make more environmentally friendly purchasesThe challenge remains balancing the objectives of maximising profit while maximising positive environmental impact. The good news is that the tools to do this are getting better and better: the corollary is that excuses for inaction are ever less sustainable. 

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