2021: the year sustainability moves to the top of the agenda for stakeholders in the hotel industry?

There have been attempts at an international level to reduce carbon dioxide emissions for decades and the Paris Climate Agreement in 2015 aimed to limit any resulting global temperature increase to well below 2 degrees above pre-industrial levels. There has also been an explosion in the awareness of, and demand for, sustainability across all sections of society over the last few years, be it reducing carbon dioxide emissions or eliminating plastic waste. The discussion regarding the shift to a low carbon, circular economy was amplified in 2020 and the UK government set out a ten point plan in November to accelerate the path to net zero. The sustainable agenda is also influencing investment decisions and there is little doubt that demand for assets with strong environmental, social and good governance credentials is growing especially in the real estate sector.

Real Estate

We are seeing that stakeholders within the market are placing a greater emphasis on the use of sustainable practices within the real estate sector. This has been driven by a combination of increased government, investor and consumer demand. The general aim of these stakeholders is to bring both existing and future real estate stock up to a carbon net zero status and therefore provide protection against the future risks of climate change.

People are telling us that occupiers who operate a hotel with a lower carbon footprint have the advantage of lower running costs of the building and are also able to achieve a greater brand connection with consumers whilst future proofing their business. However, the main barrier to implementing changes such as energy-efficiency modifications is usually the high initial cost, which is, more often than not, being borne by owners who only see the benefit of these improvements in the longer term.

Hotel owners and operators are increasingly seeking to improve both the energy efficiency and water and waste management of their buildings in order to reduce their running costs. We are seeing this reflected in the terms of new hotel management agreements and leases, such as obligations on parties to use more sustainable practices in order to obtain higher energy efficiency.

Technology will also continue to play a key role in improving both existing and new buildings. For example, the installation of water and heating systems powered by solar energy and other renewable sources, the use of responsibly sourced materials with a high recycled content and from local sources and the installation of LED lighting systems which incorporate daylight sensors and automatic dimming technology.

Construction

Hotels are part of the built environment. Disturbingly, the UK Green Building Council has reports that the built environment accounts for 40%of the UK’s emissions, causing human-induced climate change. In an industry that needs to keep up with ever more ethically and environmentally minded customers, the sustainability of hotel buildings and how they are constructed is being scrutinised more closely now than ever before and will continue to play an important role in the future.

Where they are not already doing so, hotel owners and operators may wish to consider including ‘green clauses’ or ‘climate clauses’ in building contracts, in order to make sustainability a contractually enforceable obligation in relation to any construction works. This does not just apply to using ‘green’ building materials. It can cover anything from sustainable design, to including incentives for energy efficient modifications, or how resilient the building will be to changing climates.

Retrofitting and refurbishment should not be left out of this conversation. When buildings are responsible for 40% of energy usage globally, and hotels are often modernised or redecorated, ensuring any changes to the building structure helps to reduce both the property and the business’ carbon footprint is of vital importance.

Hotel owners and operators are increasingly showing commitment to reducing their carbon footprint by ensuring the entire building process (including refurbishment) is sustainable. Modular construction, already an established feature for some hotel owners and operators, is a good example of this, whereby a hotel’s components (‘modules’), such as bathroom pods, are constructed off site in a factory and then transported to the site for assembly. Modular construction has a number of benefits including cost, economies of scale, increased speed of construction and lower energy requirements.

Last year saw the launch of The Energy & Environmental Alliance, a new coalition of hospitality businesses and investors, seeking positive change around climate change and sustainability. The aim of the Alliance is to bring together key stakeholders in order to combine resources, share knowledge and implement new technologies. The Alliance is also keen to help its members become carbon net-zero businesses in a cost effective manner and which will be delivered through an exclusive partnership with BREEAM (the world’s leading sustainability assessment method for master-planning construction projects, infrastructure and buildings). The aim of the partnership is to create a standard for sustainable building management in the hotels and leisure industry. As Ufi Ibrahim said during the jointly held Bird&Bird and HVS webinar: ‘How will your business change for the new landscape?’ (https://watch.twobirds.com/how-will-your-business-change-for) “There is a lot of pressure on hospitality and businesses. …Change must happen in our industry and it (…) really needs to start now”

Innovative green building technologies look set to transform the construction industry and hotels will be part of this. Whether the focus is on increasing profit margins through lowering utility costs or increasing the appeal of a hotel to eco-consumers, the drive to meet sustainability goals is here to stay.

Finance

Lenders have a key role to play in catalysing the decarbonisation of the real estate sector and encouraging activities and practices which contribute to broader climate change mitigation goals. Lenders are increasingly paying attention to the sustainability credentials of financed assets, with some lenders able to offer reduced financing costs for projects that meet certain criteria.

The Loan Market Association has published the Green Loan Principles and guidance on their application in the context of real estate finance for green buildings and retrofit projects. To meet the required criteria for a Green Loan the proceeds must be utilised to finance or re-finance a "green project" e.g. a green building or capital expenditure for improving the energy performance or water demands of a building. The project needs to be evaluated (for example, EPC performance certificates can assist with this), the proceeds monitored (a separate bank account is often used) and the borrower must report to the lenders on the use of proceeds. These requirements will be reflected in the finance documentation.

There are a number of examples of successful Green Loans in the market. For example, in October 2019, Derwent London signed an RCF with HSBC UK, Barclays and Natwest which included a £300 million tranche that met the requirements of the LMA's Green Loan Principles. Further, in July 2020, Argent signed a £69 million facility with HSBC UK and Natwest for the development of a sustainable residential development in King's Cross, London. This followed Argent signing a £400 million facility in 2018 which was the first Green Loan in the UK to be utilised for a commercial development.

Conclusion

Setting aside the other challenges currently facing the hotel industry, there is a greater focus from all stakeholders on sustainability within the built environment which is likely to continue in the coming years. This will inevitably result in a sustained drive towards more energy efficient buildings as the UK economy seeks to reach net zero carbon emissions by 2050.