Hotel developers, investors, operators and governments across the Asia Pacific are focusing on adopting sustainability practices into hospitality. However to keep pace with the Paris Agreement's targets, the hotel industry needs to reduce carbon emissions by 66 percent per room by 2030.

Amidst a looming ESG skills shortage in the Asia Pacific, Europe is taking the lead in most aspects of sustainability. However, as a development focused region, the Asia Pacific has an opportunity on take charge with aligning interest on sustainability. Sustainably built and designed hotels perform more efficiently, implying utilities cost savings for owners, lower future regulatory capex requirements and create an opportunity to obtain green financing.

Given the developing nature of the Asia Pacific, a real opportunity for the sustainable practices lies in hotel management agreements (HMAs). This is an area where the region can lead innovation in the sector and deepen lending options in a capital constrained environment.

Desires of investors, owners and operators

There is increasing evidence that investors in Asia Pacific will pay more for hotels with a high level of ESG credentials as this better aligns with their investment values, and due to higher performance during operation.

Hotel owners, primarily those institutional in nature, have also made commitments to sustainability goals, yet many continue to be mostly motivated by complying with regulation which is lacking in most of Asia Pacific.

Hotel operators have made carbon reduction commitments, adopted greener brands and technical standards, and are setting guidelines for their properties to follow in terms of sustainable practices. This trend is consistent across all operators - from the international chains to regional operators and across all segments; from luxury resorts to limited service and extended-stay products.

Investor and owner objectives are converging to drive sustainability in the hotel industry. Investors seek profitable opportunities that align with their values, while hotel owners are increasingly motivated by a range of sustainability goals, including reducing operational costs and enhancing brand reputation.

As ESG becomes an increasingly important investment metric for investors and broader stakeholders, and there is a real opportunity to better align interests through HMAs. Green HMAs are a vital tool for holding hotel owners and operators accountable. Financial incentives are aligned with environmental stewardship, leading hotel owners to take proactive steps to reduce costs, enhance brand reputation, and contribute to a sustainable future through CSR initiatives.

Innovating with the adoption of green HMAs

Traditionally, financial incentives embedded in HMAs have been focused on maximising revenue and profits over all other KPIs. As shareholder value and targets are now increasingly driven by ESG results, updating these incentives is the place to start.

By including ESG KPIs in HMAs, hotels can create accountability and responsibility for sustainability and social actions. The owner will have the benefit that the operator (running the day to day) will be more focused on achieving ESG KPIs, whilst the owner (providing capital and funding) can be further pushed to allocate funds to ESG investments.

For hotel owners, green HMAs provide multiple benefits. Not only are they able to meet carbon reductions commitments but are seen as a socially responsible owners. By partnering with operators, they can further enhance their design and operations knowledge to complement existing expertise on sustainability matters.

Financially, owners can reduce future rectification costs as regulatory pressures continue to increase, as well as increase the value of their hotels while potentially gaining access to green loans and other incentives. ROI on ESG initiatives is constantly improving due to demand and cost benefits. By having ESG incentives written into the HMAs, a commitment is clearly demonstrated to shareholders by owners.

The opportunity for operators sits in building a culture of sustainability across their portfolio. With greater ESG initiatives, they can increase brand perception amongst guests who value sustainability measures and want to minimise their ecological footprint, as well as engage and attract employees who have the same values. In addition, they can meet stringent ESG requirements from clients, increase fee income with profit enhanced by energy, water and waste efficiencies, as well as meet net-zero carbon commitments.

Hotels can drive innovation, differentiating themselves in a dynamic industry by embracing novel technologies, eco-friendly practices, and customer-centric strategies through HMAs. These agreements offer the framework for hotels to pioneer progress collaboratively.

A prime example is InterContinental Hotels Group (IHG), which employs the Green Engage program to support hotels in reducing their environmental footprint. This initiative includes tools like an online energy management system and a waste reduction calculator.

It’s time to harness the Green HMA

By harnessing the potential of HMAs and hotels working in tandem, green transformation becomes a powerful force in minimising the environmental impact of the hotel industry. Integrating sustainability targets into HMAs can set a hotel apart from competitors, making it a more attractive investment for owners and a more sustainable business for operators, which can benefit all parties in the long term.

With investment increasingly focused on the triple bottom line and meeting decarbonisation targets, it is clear that the HMA needs to evolve to align interests beyond the current highly financially focused model.

By Xander Nijnens, Senior Managing Director, Head of Advisory and Asset Management, Asia Pacific, JLL Hotels & Hospitality Group