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European hotel sector: Sustainability is a competitive necessity

October 4, 2024
Graeme McCormack
Head of Fund Management – Hotel & Leisure Division
Hugo Steen
Head of Investments – Hotel & Leisure Division
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Once a competitive advantage, sustainability is now imperative in the European hotel sector. Investors and operators both have responsibilities to be good stewards of the environment and of the communities in which they operate. In many ways, financial performance depends on sustainability. A strong sustainability strategy enables stakeholders to identify opportunities and manage risks related to environmental, social, and governance (ESG) factors—as well as drive performance to create long-term value.

The shift from sustainability as competitive advantage to sustainability as competitive necessity is driven by several factors:

  • Awareness of climate change and its human impacts is now ubiquitous, and many people have experienced those impacts firsthand. As a result, travellers are more likely to be eco-conscious, making hotel selections with sustainability considerations in mind, and employees are more likely to want to work at hotels that prioritise their health and well-being.
  • Inflation put significant added pressure on operators to reduce costs and increase efficiency.
  • Increasingly stringent environmental regulations, often on capital lenders, mean fewer potential buyers and forced price discounts for non-compliant properties, which strengthen the financial case for sustainability as a competitive necessity.

Together, these factors have made sustainability a competitive necessity in the European hotel sector. In this paper, we explore why sustainability matters for hotel investors and how to think about sustainability in property selection, capital improvement, operating structure, and operations.

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Risk Considerations
Investing involves risk, including possible loss of principal. Past Performance does not guarantee future return. All financial investments involve an element of risk. Therefore, the value of the investment and the income from it will vary and the initial investment amount cannot be guaranteed. Potential investors should be aware of the risks inherent to owning and investing in real estate, including value fluctuations, capital market pricing volatility, liquidity risks, leverage, credit risk, occupancy risk and legal risk. All these risks can lead to a decline in the value of the real estate, a decline in the income produced by the real estate and declines in the value or total loss in value of securities derived from investments in real estate. International investing involves greater risks such as currency fluctuations, political/social instability, and differing accounting standards. Integration of sustainability considerations and/or environmental, social and governance (ESG) factors is qualitative and subjective by nature. There is no guarantee that the criteria used, or judgment exercised, will reflect the beliefs or values of any particular investor. There is no assurance that any strategy or integration of sustainability considerations and/or ESG factors will be successful or profitable.

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