Investors Prod Hotel Leaders on Climate Promises

Climate-related risk is on investors’ minds as they look at their hotel portfolios.

That’s the word from Gilda Perez-Alvarado, who has spent the past month on a world tour talking to hotel investors. She’s the Global CEO for hotels and hospitality for JLL’s Hotels and Hospitality Group.

• “It was brought up in every single meeting we had in the Middle East and Asia,” Perez-Alvarado said in an interview before she went on stage at Skift’s Future of Lodging Forum last week.
• “The biggest challenge is that there isn’t a playbook that specifically lets investors know what they need to follow to get a favorable rating or handle scrutiny by regulators,” Perez-Alvarado said.
• “When you look at the ultimate investors in many real estate funds, you’ll see sovereign wealth funds, pension funds, and other institutional investors,” Perez-Alvarado said. “These investors are becoming much more demanding that their investments have a path to net-zero carbon emissions and are insulated from future regulatory and litigation risk.”

In April, Ascott Residence Trust issued a sustainability-linked bond — apparently the first in the hotel sector — worth about $143 million ($200 million Singaporean).

• “I sat with them in Singapore,” Perez-Alvarado said. “It was brilliant. It was oversubscribed, signaling investor appetite.”
• Sustainability-linked bonds are different from green bonds. They set macro targets for a company, while green bonds commit to specific projects.
• If we look at travel in general, the sustainability-linked bond is a tool that lends itself well to the entire travel and leisure industry because it provides flexibility.
• The investment concept is growing fast.
• Last year, we had about $103 billion issuance in sustainability-linked bonds. Year before that, it was about $12 billion. The year before that, the bonds almost didn’t exist.
• Ascott Residence Trust has committed to a sustainability performance target of greening half of its total portfolio by 2025.

Investors have slowly nudging companies toward adopting carbon-reduction efforts.

• “The SEC [the U.S. Securities and Exchange Commission] now recognizes climate risk,” said Leslie Samuelrich, president of Boston-based Green Century Capital Management. “So larger companies are being asked to report on climate risk.”
• “Giant asset managers like BlackRock, State Street, and Vanguard are developing products tied to ESG [environmental, social, and governance] standards,” Samuelrich said. “They’re figuring out that one of the ways to sell those products is to get attention by doing shareholder engagement. That means they’re more often voting their proxies for climate issues, which is a change for them.”
• Green Century has coordinated shareholder resolutions, board appointments, and educational sessions for company management teams on behalf of about 120 institutional investors representing more than $15 trillion in assets.

Investor action at one travel company can have ripple effects affecting hoteliers.

• Here’s an example. Last year, a shareholder initiative successfully forced Booking Holdings to do a climate change report. The report came out last month. Now the effect is cascading.
• “Booking.com has begun assigning a sustainability rating to hotels,” Perez-Alvarado said. “That may shift demand, especially among millennials in Europe traveling worldwide, and affect portfolios that are laggards.”
• Investors are increasingly suspicious of companies that rely heavily on buying carbon offsets because that tends to be a sign of procrastination rather than planning.
• The process remains murky and slow burn, though. There’s a debate about measuring the greenhouse gas emissions that contribute to climate change. IFRS Foundation, the international accounting standards-setting body, has in recent months been working on setting standards for emissions-focused reporting with a board created in November. Their work will impact how investors evaluate climate risk.
• S&P Global has begun rating companies on sustainability. Its Sustainability Yearbook 2022 rated Hilton Worldwide, Meliá Hotels International, and NH Hotels tops in its hotel rankings.

Building net-zero hotels — or properties that aspire to cap carbon emissions linked to construction and operation —are the most dramatic new trend.

• A collection of private investors has backed a just-announced net-zero hotel project in Denver. When it opens in late 2023 or early 2024, Populus may become the first “carbon positive hotel” in the U.S. by mixing offsetting actions with other carbon reduction methods.
• “Our company builds environmentally responsible projects without compromising on return on investment,” said Jon Buerge, chief development officer of Urban Villages, creating the hotel. “A decade ago, we developed a net-zero residential project in California called West Village that generated a tremendous return on investment.”
• “Essentially, we’ll be able to sell the hotel rooms at higher rates than the competitive set by appealing to climate-conscious consumers,” Buerge said. “Demand growth will outpace supply in the next decade as weird weather and natural disasters sadly make the climate change more personally relevant.”
• The company has hired consultants to estimate the carbon emitted when building the structure, including carbon emissions to create materials such as concrete, steel, and timber — and to estimate how much a building emits carbon day to day. Developers can switch to less carbon-intensive materials.
• “What emissions we can’t cut, we can offset,” Buerge said. “We’re looking at options, and we might sequester carbon by planting about 5,000 acres of forest land.”

A few other companies are attempting net-zero or carbon-positive hotels.

• Remington Hotels, a U.S. operator, on Monday opens the 165-guestroom Hotel Marcel New Haven, Tapestry Collection by Hilton, which aims to be net zero over time. Its features include triple-glazed windows to minimize heating and cooling loss.
• Six Senses Hotels & Resorts last month signed on to operate a planned Svart hotel in Norway. The futuristic property will aspire to generate more energy than it consumes.
• Room2, a London-based budget operator of “hometels,” or apartment-style travel lodging, is expanding on a promise of low-carbon operations.

Efforts to make the hotel sector more climate-friendly often seem to have a three-steps-forward,-two-steps-back rhythm.

• For example, this year’s energy crisis in Europe because of the Ukraine war has begun tempting some investors, such as BlackRock, to postpone pushes on climate change.
• But carbon emissions continue to disrupt the climate in the meantime.
• Whoever “greens” their portfolio first may benefit when demand for low-carbon travel revives, said Neil Dipaola, CEO of Autocamp. Dipaola has won awards for his work on sustainable development in California.
• “If you care about the long-term sustainability of your business and your kids, then you’ll be thinking about ways you can remove single-use plastics from your properties and putting solar on your roofs and energy storage under your buildings to reduce your need to be on the grid,” Dipaola said.