Given the pressing issue of climate change the world faces today, sustainable financing is gaining attention globally and in Asia Pacific as a valuable tool for the private sector to adopt more responsible practices. There are multiple factors contributing to its significance.

  1. Businesses are increasingly aware that climate risk impacts the bottom line and want to explore how it can be accounted for in their property’s long-term value.
  2. Governments in the region are gradually mandating climate disclosures, forcing the investors to consider such factors in investment and asset management decisions.
  3. The importance of adopting sustainable practices to upkeep a positive corporate reputation.

As such, stakeholders of the industry will continue to demand more sustainability measures, setting the stage for sustainable financing to play a larger role in the industry.

Although banks and corporations already offer various forms of sustainable financing, such as green loans and sustainability-linked loans, it is not common to come across organizations which are on track to meet their decarbonization targets. The demand for sustainable financing is significant, with an annual requirement of green loans estimated at around US$9.2 trillion by 2030 to support the global transition to a net-zero carbon economy[1]. However, the current annual investment falls short, with less than US$2 trillion being invested each year[2] despite goals for lending institutions’ aim to reduce their own exposure to climate risk, achieve decarbonization targets, and meet stakeholder requirements.

Sustainable financing has the potential to bridge this investment gap and serve as a vital tool for stakeholder commitment. However, there are challenges that limit its potential such as lack of clarity and coordination, reliance on rigid certifications and high cost of due diligence and audits. Nevertheless, the industry is improving data transparency which is expected to usher in a new period of renewed growth for sustainability financing in the industry.

The lack of sector-driven approach in setting standards for hospitality hinders the establishment of sustainability targets

Due to the broad guidelines of sustainability frameworks such as the Paris Agreement and UN Sustainable Development Goals (SDGs), lenders often face the challenge of interpreting global targets independently. As a result, inconsistencies and lack of relevance to hospitality real estate are commonly observed in the sustainability loan standards.

Lenders' sustainability frameworks, part of which outlines their eligibility criteria for real estate, typically references globally recognized building certifications and vague energy enhancement works such as improved chillers, replacement of boilers, implement energy management systems. While others display an elevated level of specificity and measurability (e.g. retrofit of existing buildings achieves a minimum 30% energy and/or carbon emission reduction after retrofit and is within the top 15% of buildings in the relevant market) there are no clear methodologies around data collection and tracking, nor the specification of the standards utilized for benchmarking purposes. This places hospitality at a disadvantage because it is the most resource intensive real estate type, as well as one with the most complex supply chain network.

The lack of clear guidelines, standards, and strategic approach in defining sustainability in hospitality creates inefficiencies in identifying impactful opportunities within the sector. Various lending institutes offer sustainability-linked loans based on one or two KPIs of the borrower’s choice. Since there is often no benchmark data to rely on, the process of determining the reduction target is based on the subject property’s baseline. This lack of robust benchmarking and supportive data raise question around how ambitious the ESG targets are and whether the assessments of borrowers’ sustainability achievements are stringent enough to align with the global targets that are referenced in their sustainability frameworks.

Innovative approaches falling through the certification cracks

Lenders have relied on green building certifications as a measure of sustainability in real estate, typically in absence of pre-established industry standards and guidelines, and thereby fail to recognize certain green initiatives implemented in an innovative manner.

Building certifications are often structured under a rigid checklist scheme and disincentivize developers to think outside of the box for hospitality concepts. For example, LEED favours developments on sites with quality public transportation, grid harmonization and electric vehicle charging stations. However, these criteria are more appropriate for urban hotels in developed countries, ignoring resorts in remote destinations with less green infrastructure.

For example, the industry leading ESG efforts at Soneva in the Maldives, including their on-site recycling and repurposing center, coral propagation program and other community initiatives supported by 2% of the resort’s revenues, may not be given full credit under various green building credentials commonly considered under the lenders’ sustainable financing frameworks.

Remote resort destinations and coastal cities which are most reliant on tourism and often the most exposed to climate risk must have their own frameworks to incentivize green initiatives. There is also an innate challenge for full-service hotels to achieve higher credential levels due to the resource intensive offering necessary in providing the service expected by the guests and brand standards.

As such, building certifications may inadvertently exclude owners and properties that are willing and able to make environmental and social impact, or those that more urgently require sustainable financing for climate risk mitigation. Consequently, lenders will need to critically rethink the nuances across the hospitality sector and consider introducing KPIs and supplementary criteria to address the limitations of existing green building certifications.

Sustainable financing due diligence has to be streamlined for the hospitality industry

The reliance on green building certifications and the lack of standards ultimately leads to increased financial and resource burdens on borrowers seeking sustainable financing. Higher due diligence and audit costs offset the incentives provided for sustainable financing, discouraging borrowers from pursuing sustainable financing. Small firms, cost-sensitive owners, and family offices, which constitute a significant portion of hospitality real estate ownership in the Asia Pacific region, often lack motivation or regulatory pressure to incur expenses for sustainable financing standards. These financial incentives also present challenges for lenders, who may struggle to offer competitive terms against other lenders, which are providing debt with lower due diligence requirements.

The process of compiling ESG data and the daunting cost of certifications pose a significant hindrance to the widespread adoption of sustainable financing, despite the best intentions of both lenders and borrowers to support sustainable practices and meet sustainability targets.

Unlocking the potential of sustainable financing in hospitality with improved data transparency and target setting

It is crucial for lenders to play a role in achieving data transparency and structure in sustainable financing. Lenders should collaborate with owners and operators to support their global targets with robust data and benchmarking, whilst being flexible and critical in considering local regulations and the nature of the category of hotel. The NABERS rating system in Australia has proven instrumental in providing reliable, actual energy consumption data, enabling lenders to shorten their due diligence period and reduce costs associated with sustainable financing.

Although such a rating system is not readily available in all jurisdictions in all of Asia Pacific, lenders should strive to obtain more actual, real-time data which is hidden behind the green building credentials. Lenders can also consider operations-focused certificates such as Earth Check, Green Globe, Green Key as well as GSTC in conjunction with the real estate focused certifications like LEED, BREEAM and EDGE.

Furthermore, regulatory disclosure requirements and industry reporting standards will further incentivize businesses to dedicate resources and investments into data management which lenders can benefit from. The revised accounting standard for USALI's 12th edition, which includes detailed tracking of energy, waste, and water, will encourage hotels to adopt a more granular accounting system. Mandatory climate-related financial disclosure requirements will continue to incentivize better data transparency across various jurisdictions. With improved data transparency, lenders will have a basis to request ESG data from borrowers to strengthen their sustainability financing eligibility assessment as well as their broader framework.

Recognizing the need for external support in data transparency and validation, governments have gradually put in place schemes to encourage sustainable financing. For example, the Sustainable Loan Grant Scheme provided by the Monetary Authority of Singapore allows corporates to offset expenses related to external reviews of eligible sustainable loans, thereby lowering the barriers of adoption.

Reliable and clean data lies at the heart of impactful and credible sustainable financing. However, it will take the broader commitment from owners, operators, and regulators to achieve transparency. With the ongoing push for more transparent reporting and accounting requirements, lenders will be in a better position to lead conversations with borrowers to better measure targets, allow for innovation in green initiatives and streamline due diligence to support business decisions and sustainability ambitions across all stakeholders.

Final thoughts – Lending institutions need to adopt a tailored approach for hospitality

When evaluating sustainable financing options for the hospitality industry, it is common for lending institutions to apply criteria that are established for the broader real estate sector. However, as emphasized in this article, generic building certifications or energy usage benchmarks may not be suitable for capturing the unique characteristics of the hospitality sector. Unlike other asset classes, hospitality is distinct in its emphasis on service and experiential value, operational complexity, and direct impact on the community and environment. There are also hospitality-specific challenges, such as the segregated domains of control between owner and operator as well as extensive upstream and downstream supply chain networks, making sustainability in this sector require extensive effort and coordination.

It is imperative for lending institutions to acknowledge and understand these inherent qualities of hotels in order to provide impactful sustainable financing in the Asia Pacific region. As transparency and data standardization improve, lenders will have an opportunity to gain hospitality-specific insights and support the industry’s broader transition towards sustainability. To unlock the true potential of sustainability in the hospitality sector, lenders will need to assess hotels from a sector-specific perspective and engage in proactive discussions to identify and align the business drivers with measurable sustainable impact. We are still in the beginning of the journey, but the mentioned changes will be essential for successful implementation of sustainable financing in hospitality.

[1] https://www.mckinsey.com/featured-insights/future-of-asia/green-growth-capturing-asias-5-trillion-green-business-opportunity [2] https://www.deloitte.com/cbc/en/issues/climate/financing-the-green-energy-transition.html

About JLL

For over 200 years, JLL (NYSE: JLL), a leading global commercial real estate and investment management company, has helped clients buy, build, occupy, manage and invest in a variety of commercial, industrial, hotel, residential and retail properties. A Fortune 500® company with annual revenue of $20.8 billion and operations in over 80 countries around the world, our more than 111,000 employees bring the power of a global platform combined with local expertise. Driven by our purpose to shape the future of real estate for a better world, we help our clients, people and communities SEE A BRIGHTER WAYSM. JLL is the brand name, and a registered trademark, of Jones Lang LaSalle Incorporated. For further information, visit jll.com.

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