LONDON — The risk from climate change and its resultant effects on the travel and hotel industry is no longer merely something that can boost, or damage, a property’s reputation. It's more of an issue of valuation and pricing.
Ufi Ibrahim, CEO of Energy & Environment Alliance, said at last month’s Hotel Industry Development Event that the days of virtuous one-liners and glossy manifestoes are over. Now is the time for talking about value and relevant sustainability strategies that are both financial and future-proof.
Marc Lepere, professor in practice of sustainability, lead in environmental, social and governance and sustainability at King’s Business School at King's College London, said he always has looked at the sustainability equation from a financial angle, not an ethical one. He added a new “carbon risk premium” is required and being discussed by hotel industry professionals and other stakeholders.
Physical risks include drought, fire, flooding, heatwaves and rises in sea level, Lepere said. Transition risks include regulation, legislation and financial stipulations, policy and change.
Despite noise deriving from certain administrations and regions, sustainability issues increasingly are affecting pricing, valuations, underwriting, debt, property investment plans and which investors and buyers are able to come to the negotiation table.
In some states and cities in the U.S., penalties for exceeding carbon limits will increase as 2030 nears, Lepere said. In Europe, government building and construction regulations will before that year require “detailed renovation passports and emissions disclosures.”
Ibrahim said hotels must stand up as being “resilient.” Those that are will be “insurable, bankable, operable and therefore continue to be valuable over time,” she added.
Philip Lassman, managing director for the United Kingdom at Numa Group, said he sees his hotel brand’s business model as one that because of its leanness can more easily tick all the right boxes. Numa’s use of technology decreases his hotels’ energy use and costs.
“Buildings cost money to run … but we’re getting market pricing for our rooms, so there are much better returns on investment in our model,” he said.
Competition will fuel sustainability, Lepere said. Only the fittest will attract investment.
“The compliance burden is becoming a condition of capital access. Resilience is therefore not optional. It is a license to operate,” he said.
Central bankers and regulators regard commercial real estate as representative of what he called a “secondary vulnerability,” Lepere added.
“Real estate is the largest asset class globally. If valuations destabilize because assets are uninsurable, non-compliant or facing escalating penalties, the impact is systemic,” he said.
A premium issue
The insurance and reinsurance industry has taken notice.
Marc Lehmann, head of natural catastrophe and climate risk advisory at insurance company Howden, said his industry is already repricing sustainability risk and modeling exposure across hotel portfolios. He added the insurance industry is identifying hotels that suffer “average annual loss. Insurers now deploy location-based catastrophe models with granular precision.”
Because of these very financial reasons, insurance premiums are rising and insurers’ appetite for some cities and regions are decreasing, Lehmann said.
More risk and less future-proofing equal higher premiums, and in some cases the absence of insurance coverage.
Lehmann added that an asset's climate resilience can be measured and therefore monetized.
He said hoteliers should not expect premiums to drop exponentially if the right strategies and initiatives are put in place, but they “can slow the rate of increase and secure access to capacity. In a tightening insurance market, that in itself protects value.”
Tom Wilson, director of BPS product, sales and data at Building Research Establishment, said when financial instruments enter the equation to a degree in which they cannot be ignored, sustainability and resilience quickly stop being peripheral themes.
He added investors will notice hotels that are not only able to be resilient but also recover or reopen more quickly than their competitors.
“Hospitality may be fragmented at the asset level, but collectively it represents tens of millions of rooms,” Numa's Lassman said. “When large platforms and brands embed resilience into standards and operating models, the direction of travel becomes structural.”
Wilson said the hotels, brands and firms that get it right or close to right will see preserved their “revenue, brand trust and market share. Resilience therefore has both defensive and offensive dimensions.”
The pressure of finance and government on hotel sustainability and climate resilience will only get heavier, Lepere said.
“Climate volatility is increasing regardless of electoral cycles. Moreover, many regulatory drivers are municipal rather than federal, linked to infrastructure funding gaps and local fiscal realities,” he said.