ESG – Governance is in the Driving Seat

The commitments made at the UN Climate Change Conference UK 2021 (COP26) will be driving our business strategies in the years to come. Not only will world leaders be presenting ambitious 2030 greenhouse gas emissions reductions targets (NDCS), but also discussing how they can work together to protect communities affected by climate change, to protect and restore their natural habitats. Importantly, to realise these two ambitions, finalising the Paris Rulebook and mobilising finance – the developed nations promise to raise $100bn in climate finance per year – are also top of the agenda.

We have all witnessed how exposed our industry is to extreme weather events. The 2020 Australian bushfires reportedly cost the tourism industry AUD $4.5 billion, (even before the onset of Covid 19). Whilst the water crisis in Cape Town in 2018, led up to USD $65 million shortfall in the region’s hospitality industry.

Many hotel operators and owners have Environmental Social Governance (ESG) strategies in place, but a more regulatory framework will pave the way for owners, operators, investors, landlords and regulators requiring far reaching evidence of compliance.

The Sustainable Hospitality Alliance states our industry needs to reduce its carbon emissions by 66 per cent per room by 2030 and 90 per cent per room by 2050 to ensure that the predicted industry growth does not lead to a corresponding increase in carbon emissions.

The need to adopt ESG  policies and engage in a more joined up approach to building, refurbishing and operating a hotel has never been more important. But, will it make good business sense?  Mounting evidence shows that environmentally and socially conscious business practices can lead to growth from consumer demand and higher public market valuations. For example, in 2020 the Sustainable Hospitality Alliance’s research found 53% of North American companies have corporate sustainability programs that affect their decision to contract with a travel supplier. By focusing on ESG, hoteliers can mitigate future risks to revenues and drive demand from conscientious consumers.

The stick approach

For businesses and institutions operating in Europe, two important developments have taken place;

The Sustainable Finance Disclosure Regulation (SFDR) came into force in March 2021, it was designed to make it easier for end-investors to make informed investment decisions, improve industry-wide comparability, and prevent greenwashing. The SFDR applies principally to asset managers and financial advisors who do business in the EU. It seeks to reorientate capital flows towards sustainable investment, promote the inclusion of sustainability in risk management, and foster transparency and long-term thinking into financial and economic strategy.

In April 2021, the European Commission adopted a proposal for a Corporate Sustainability Reporting Directive (CSRD), which would require large/listed companies to audit reported information and to report according to mandatory EU sustainability reporting standards.

The move to net zero carbon real estate

Meanwhile in the UK, in November 2020 the Chancellor announced the UK would make Taskforce on Climate-related Financial Disclosures (TCFD) -aligned disclosure mandatory by 2025 for the whole UK economy with interim measures capturing an increasingly wide section of the economy between 2021 and 2025.

Pinsent Masons, in their guide to Net Zero Carbon Real Estate stated; “TCFD disclosure includes, if appropriate, Scope 3 emissions which mean the real estate sector will need to become more concerned about the embodied carbon in their new developments and in other building works, and in their tenants’ fuel and electricity use. The Real Estate sector will increasingly be subject to legal requirements designed to drive a transition to net zero carbon.”

The private sector has its own voluntary initiative. The Better Buildings Partnership is a collaboration of the UK’s leading commercial property owners who have been adopting and publishing their own pathways to net carbon zero. The BBP guidance encourages members to adopt a broad scope in their net zero pathways for all directly or indirectly owned or funded real estate assets, covering emissions from the whole asset lifecycle; from embodied carbon in the development phase, through to emissions in the operational  and end-of-life phases, and covering the broadest scope of emissions extending beyond those they have direct control over (e.g. their tenant’s energy use and the emissions associated with the building in their supply chains).

ESG criteria in lending decisions

Crucially, lenders are using ESG criteria in lending decisions. They are recognising that the market value of sustainable loan collateral is likely to be more resilient, meaning lower risk can justify potential margin discounts. The Sustainable Hospitality Alliance’s research stated that the IFC had financed $5.4 billion in green buildings, of which almost $1 billion were in green hotels. However, according to the IFC, green investment needs to double to meet the Paris Agreement 2030 targets.

That said, there is currently no single, agreed definition of what constitutes sustainable finance in real estate. It has been defined in the bond market as incorporating climate, green and social finance whilst adding wider considerations concerning the longer-term economic sustainability of the organisations that are being funded.

Looking to the future

As owners and investors look to repurpose real estate, refit or build greenfield projects, ESG factors need to be placed at the centre of the design and build. The need to be able to value, rate and record sustainable investments and credentials will be necessary to build a sustainable pathway life cycle of the building to the benefit of landowners, hotel operators and investors. Encouragingly, in 2020 the Sustainable Hospitality Alliance’s research found sustainable buildings are at least 20% more resource efficient and that sustainability upgrades have a typical payback period of less than one year in utility savings for new builds and from one to ten years for retrofits.

What is certain is that the governance will take operators beyond ‘greening’ consumer offerings and the adoption of reporting carbon tools and technologies that streamline and optimise ESG practices. Hotel developers and investors will need to use ESG metrics in investment analysis to identify the performance of both current and future hotel assets, with the ability to correlate a better risk-adjusted ROI in the long term. This will also increase long-term resilience to both legislative and environmental changes, whilst also attracting investors looking for a sustainable portfolio.

Of course Hotel Solutions Partnership is here to offer advice and support to guide you on your ESG journey.


Katrina leads the Hotel Solutions Partnership, a global hotel and hospitality consultancy, helping investors, developers and operators to acquire, develop and/or operate hotels, integrated resorts and private clubs internationally.

Over the past 20 years, she has delivered assignments across the United Kingdom, Europe, the Middle East and Asia. She has undertaken feasibility studies and turn-around plans, implemented development strategies, and advised owners on acquisitions as well as divestment of assets and operating platforms.

Passionate about sustainability, Katrina played an active role in founding the Philippine chapter of the World Wildlife Fund. She also chaired the International Hotels Environmental Initiative and is a former member of Sustain Worldwide, a group of hotel and resort industry players for whom sustainable development is a stated objective.