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What is ESG-compliant development?

Explainer by Gregory Autin

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Last updated on 30 October 2020Comments

Sustainable Lending
Green loans are any type of loan made available exclusively to finance or refinance in whole or in part new and/or existing eligible "green projects". Green loan principles facilitate and support environmentally sustainable economic activity through the use of green loan products.

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The green loan principles (GLP) provide a finance industry standard for borrowers to apply in their business with the objective of improving their sustainability performance, complying with environmental regulations, or ensuring long-term financial and operational stability. They also allow lenders to provide environmentally and socially responsible financing.

Green loan principles are based on green bond principles (GBPs). GBPs are internationally recognized voluntary guidelines for the issuance of bonds that promote transparency, disclosure and reporting in the green bond market.

Sustainability-linked loan principles (SLLPs) set an international standard for determining how financing can facilitate positive corporate performance and achieve measurable growth in financing for sustainable development. Most loan documentation requires environmental, social and governance (ESG) compliance as part of the borrower's obligation to comply with the general legal requirements.

Sustainability-linked loans (SLLs) promote sustainable development by inducing borrowers to achieve ambitious, predetermined sustainable performance targets. By directly linking the financial terms of the loans to sustainable performance targets, borrowers are encouraged to improve their sustainable development management.

The borrower's sustainability performance is measured against sustainability performance targets (SPTs) as set against key performance indicators, external ratings and/or equivalent metrics to measure improvement in the borrower's sustainability profile. They are the environmental, social and governance (ESG) metrics that help identify assets and portfolios that adopt sustainability principles.

Green bonds and green loans aim to facilitate and support environmentally sustainable activity through the financing of green projects. However, the use of sustainability-linked loans is not restricted to green purposes.

Sustainable Investing
Environmental, social and governance (ESG) metrics enable enterprises and undertakings to reach their long-term business goals, improve relations with stakeholders and local communities, and boost their brand recognition and value. An ESG benchmark provides comparable and reliable data on the ESG performance of investments in real estate assets.

Besides sustainability, an ESG benchmark is used to improve the investment performance of properties. ESG-compliant investments generally perform better than real estate assets that do not comply with ESG sustainability principles.

The ESG investment policy of investors and asset managers considers the risks and opportunities associated with environmental, social and governance (ESG) issues across the investment and life cycle of properties. This reduces business and financial risk while improving the return on the investments.

Sustainable, responsible and impact (SRI) investing actively selects or eliminates investments according to specific ethical guidelines and ESG investment criteria. There is a wide range of voluntary SRI codes of conduct for the finance industry, often in partnership with public agencies and other stakeholders.

A variety of certified sustainable projects offers opportunities for investors and operators. LEED, EDGE and BREEAM are leading international sustainable building certifications that provide operational and brand-value incentives to property owners.

The United Nations Principles for Responsible Investment (UNPRI) promotes SRI investing. It recommends a variety of possible "voluntary and aspirational" actions for incorporating ESG issues into investment practices across asset classes.

The European Green Deal Investment Plan (EGDIP) was established to mobilize EU funding and stimulate public and private investments to promote and facilitate the transition to a climate-neutral, green, competitive and inclusive economy. It outlines the framework of regulations and legislation aimed at achieving the EU's sustainability targets and transformative agenda.

There are several tools for identifying hotel companies and property owners that are committed to improving the sustainability of their portfolio. The two best known are the GRESB Portfolio Analysis Tool and MSCI ESG Ratings.

Sustainable Operating
Hotel owners, operators, brands and management companies have a vested interest in the sustainability of their properties. Hotel properties are developed and operated on sustainable principles in order to keep operational costs low, meet guest demand, and protect brand reputation and business continuity.

The ESG policy of the hotel operator and/or the hotel brand is often a decisive criterion for the identification of investment opportunities.

Sustainability design must be incorporated at the earliest point of a project's design stage to ensure optimal operational efficiency, long-term asset value, and alignment with sustainability targets. Sustainable design also relies on clear communication with owners, operators and asset managers to fully realize operational efficiencies.

Hotel operations must conform with sustainability principles to operate most cost-effectively, boost resource efficiency, and further the green agenda. Sustainable hospitality is a continuous process that calls for constant impact monitoring and the implementation of preventive and/or corrective measures whenever possible.

Upfront capital expenditures in new-builds are typically made by owners that create operational savings for operators. Operators typically invest in retrofits to improve energy efficiency through building services, HVAC systems and equipment improvements, lighting, refrigeration and building controls.

Owners and franchisees must adopt sustainable hospitality operational practices - sustainable goods and services, sustainable cleaning, sustainable procurement, sustainable utilities, etc. - that comply with environmental, social and governance (ESG) principles.

Franchisors fully align their brand to sustainable operations that comply with environmental, social and governance (ESG) principles. This leads to better sentiment score reviews and is reflected in guest satisfaction and repeated service.

The combination of sustainability, digital technologies, sustainability assessment methods and systems increase the value of hotel properties. These lead to more sustainable environments that enhance the well-being of the guests, staff and local community, help protect natural resources, and make for more attractive properties for all stakeholders.

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