New ways of ESG

Finding Solutions – together! 

In addition to all current market challenges such as repayment of subsidies and deferrals, inflation and rising energy costs, the growing pressure on the topic of ESG (Environment, Social, Governance) also in the hotel industry is increasing as well as trying to find solutions for the topic of ESG. An energy turnaround and corresponding investments in the critical infrastructure are unavoidable: Even if the current energy crisis is overcome, the demands in this area will continue to increase. In this context, it is not only the hotel operators who are responsible, but also guests, developers, owners, investors, and asset managers. Success can only be achieved when players are working together!

The Importance of Factor E

Especially when it comes to the topic of climate and environmental protection (ESG factor “E”), not only operators but also owners are asked to align their properties in a resource-saving manner. The EU taxonomy came in 2022 describes a framework to classify sustainable economic activities within the EU will change the general market behaviour of all players. In the area of hotel real estate focus is put on the reduction of CO2 emissions during the construction and operation of a property.

The EU is currently not planning any punitive measures. However, it is expected that properties that are not ESG-compatible will bring lower valuations and price reductions in the future. Hotel owners will therefore ultimately be forced to add new requirements to counteract the loss in value of the properties. 

In the future, companies will be selected for capital investments that best fulfil these criteria in their respective sector – a procedure that is also assessed as “best in class”. This means that in the future, when deciding for or against a company, attention will also be paid to the fulfilment of corresponding criteria. Investors will express their desire to invest in sustainable funds, companies, or real estate even more strongly.

Building Future: New vs. Existing Buildings 

Of course, rethinking of sustainable design of real estate is equally relevant for new as well as existing buildings. New buildings seem to be handled more easily; existing buildings are more challenging and often more expensive. 

First and foremost, the new cost situation must be factored into the business plans of owners and operators. It is true that investments must be assessed in the long term and that they should achieve cost reductions in the future, for example by minimising energy and water consumption. The question is: Who will bear these costs for the first time? And who has the greater advantage in the long term? Both sides certainly – but who takes care for which part are still up for discussion.

#energy: Working with new Standards

Especially with regards to the energy transition, structural changes require a consensus between owner and operator. They require a general understanding of the life cycle – and presuppose the digitalised collection and recording of a property’s operating data. Only based on reliable and qualitatively assured data can investments for an energy conversion be offset against the savings of the more favourable operation. The (also long-term) environmental impacts of operation should be clearly named and assessed. This also applies to the costs of the CO2 tax, which according to the current status of the federal government’s draft legislation are to be borne equally. A fair division of costs or savings is of course in the interest of both sides. 

Make it modular

Modular hotel construction is one of many alternatives that takes a step towards ESG compliance. This construction method produces 68 per cent less CO2 emissions, as the buildings can be built faster and with fewer truckloads of material and less crane use. Citizen M, for example, has been creating modular properties for years. The hotel chain calls its approach “Smart Thinking”, in which re-use has reduced costs in the supply chain and the amount of waste, among other things.

Green Leases are part of the solution

“Green leases” are also part of corresponding environmental measures. Behind them are rental contracts in which (depending on the intended goal of both parties) clauses are stipulated to use and operate the property in a resource-conserving way – starting with agreements on electricity and water consumption (plant irrigation, cleaning of the building, use of tap water) and ending with waste disposal. Data collection is important. One thing is clear: against the background of rising energy costs, this area will gain in importance.

Digging deep: Collecting relevant Data

In addition, not only the project planning and construction, but above all the hotel operation is decisive in the ESG consideration: around 80 percent of the resources consumed in or by a hotel property are attributable to this life cycle. Therefore, the costs for the supply and disposal of water, waste and energy must be integrated into the financial reporting to create comparability. Otherwise, no evaluation is possible. Key figures will be included in the “12th Edition” of the globally applicable reporting standard USALI (Uniform System of Accounts for the Lodging Industry) announced for autumn 2022 under the title “Energy, Water, and Waste”. The CREEM Index (Carbon Risk Real Estate Monitor) is also a published benchmark for the ecological assessment of buildings. This measures how much energy and CO2 a building may consume per square metre per year in order not to increase the world temperature by more than 1.5 to 2 degrees.

Saving #energy 

The use of renewable energies is not only being pushed by the EU taxonomy. Especially since the end of February 2022, it has become clear due to the current supply crisis: the share of fossil fuels must be greatly reduced as soon as possible.

In the hotel industry, this can mean that new concepts are needed to save energy. For example, coordinating occupied rooms so that the lights can be permanently switched off on one floor, or leaving the sauna switched on only for a certain period of time as required by the customers.

A kind of signpost to facilitate and accelerate the green transition for market participants is to be provided by the European Union’s “REPowerEU” pact. Its goal is to rapidly reduce and end dependence on fossil fuels from Russia. There is much to suggest that this plan could give energy a similar push as the EU’s “Green Deal” did a few years ago.

Produce electricity, convert fleet

The energy transition is the most obvious approach for companies to counter rising energy prices. Pioneers can already benefit and provide best practices: Those who produce electricity and feed the surplus into the grid can sell it (currently at higher prices), thereby absorbing additional costs and shortening amortisation periods. However, there are still some (tax) legal hurdles to overcome. 

Another option is to convert the vehicle fleet to fully electric and install e-charging stations, the costs of which are largely covered by subsidies. Renovating the building envelope, using ventilation systems with heat recovery and optimising refrigeration systems can also make sense.

Facing Factor S

In addition to the topic of energy, the areas of social responsibility and governance will be more relevant in the future. On the topic of social, keywords such as social responsibility, securing livelihoods through fair work, equal opportunities and participation come up. The shortage of employees in particular sets off a spiral that drives up wages and is one of the reasons why changes are being initiated in this area. Many hoteliers are already adapting to this, for example regarding working hours (introduction of the four-day week, family-friendly hours), and in the selection of employees according to motivation rather than just qualifications. In addition, elements such as public transport connections or the equipment of break rooms are mentioned in the evaluation criteria.

Factor G: Nutzen für Gesellschaft und Aktionäre

Governance deals with sustainable corporate management and concerns control and steering processes, reputation management and corporate values. Here, too, all parties involved, from the financier to the asset manager, have a duty. Value management, compliance, and transparency, as well as the need to take into account the demands of stakeholders, are elementary. Trends and developments must be identified and used to benefit society and shareholders. This includes, among other things, taking advantage of opportunities for digitalisation and evaluating data protection within the framework of ESG criteria.

>> In a nutshell

Even if it takes a lot of patience and many small steps, the industry, investors, and operators should see the current situation as an opportunity to initiate inevitable investments in energy supply and refurbishment of real estate as well as savings measures, which they are being pressured to do anyway due to the current market situation. In the end, these measures can be vital for the survival of businesses in the short, medium, and long term.

Without data, however, there is no evaluation – so fast action is required. Particularly since the establishment of a sustainability reporting system can take up to two years. In addition to quality and operational management, the value of the property can also increase through the influence of transparency in the form of certificates and ratings, which in turn are issued based on fairness.

This article as well as further information about ESG can also be found on the elevatr homepage: Link

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