Ignore climate at your own risk

GLOBAL REPORT -- It is undeniable that our climate is changing fast, as evidenced by record temperature averages and more frequent and extreme weather events. With that will come a growing financial impact on hotels, like many other parts of our economy and society. But how can hotel asset owners and investors prepare themselves for this changing landscape? What needs to be done at the development stage and valuations?

It’s important to begin by understanding climate risks and the most recognizable will be physical ones. Floods, hurricanes, rising sea levels and coastal erosion, wildfires and extreme heat waves present direct risks to life and property. They can result in significant repair and rebuilding costs and impact the insurability and cost of insurance. We have already seen this happen in recent events like hurricanes Helen and Milton, which caused widespread flooding and wind damage across the U.S. South Atlantic region.

Physical risks can also be indirect such as those impacting the attractiveness of destinations (beachfront, natural features and ecological attractions), supply chains (water scarcity, droughts and weather disruptions to the food supply and local communities) and community assets (the livelihood of local populations who provide human resources and the cultural attractiveness of destinations).

Beyond physical risks, there are also transition risks such as those coming from not following the path of economic decarbonization. Fast-changing and stricter regulations such as energy efficiency requirements in many parts of the world may render assets obsolete. Changing consumer preferences means poor sustainability performance can impact brand perception and customer retention.

However, the major game-changing transition risk has been the rise of investor scrutiny and financial disclosure requirements. The EU’s Corporate Sustainability Reporting Directive (CSRD) and the International Financial Reporting Standards (IFRS) S2, currently adopted in the U.K. and a growing number of economies, mandate corporate sustainability data to be reported in a structured and transparent way. Those standards emphasize a “double materiality” approach in which both the financial impacts of climate risks and the organizational activities’ impact on the climate must be assessed and reported to investors. Poor performance in those areas may result in asset devaluation in the future and even stranded assets.

But it’s not only risks. Following standards such as the EU Taxonomy for Sustainable Activities opens green funding and investment opportunities at more favorable financial terms.

Investors can commission climate risk and adaptation studies as early as the site selection stage for new developments to help build resilience into their new assets and at due diligence in acquisitions to understand risks to asset value and insurance fully. 

Some investors are leading the way. Anuj Kamdar, principal at Pegasus Capital Advisors, said: “As ecotourism investors, climate resilience isn’t just about environmental stewardship; it’s fundamental to protecting returns. By carefully assessing climate risks and implementing robust mitigation strategies, we can develop hotels that contribute meaningfully to local economies and demonstrate operational resilience in the face of increasing climate hazards. Hotels that proactively address these challenges will emerge as the most compelling investment opportunities in our sector, offering both financial stability and positive community impact.”

Such studies follow a structured methodology that include reviews of climate literature, assessing climate scenarios, interviews with local stakeholders and identification of current and upcoming hazards that cover material and systemic impacts. Hazards are then classified in terms of impact level, confidence of occurrence and timeframe, for prioritization.

A key step in climate risk and resilience assessments is developing an adaptation strategy, which is needed for IFRS reporting and future-proof assets. For due diligence for hotel transactions, remediating structural vulnerabilities of properties to weather events is key, not least for insurability or reducing insurance premiums.

Ricardo Moreira

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A key step in climate risk and resilience assessments is developing an adaptation strategy, which is needed for IFRS reporting and future-proof assets. For due diligence for hotel transactions, remediating structural vulnerabilities of properties to weather events is key, not least for insurability or reducing insurance premiums. Ensuring the resilience of energy, water, communication utilities and the supply chain is important.

Additionally, existing properties are particularly susceptible to transition risks, as they are often built to outdated energy efficiency standards. Building envelope and service improvements are often necessary measures for renovations to comply with regulations in the EU, U.K. and some U.S. states, for sustainability certifications and to meet portfolio efficiency standards by major investors.

In development scenarios, individual risk mitigation measures are proposed and incorporated early on into the design and planning of developments. Examples include using masterplan zoning that incorporates buffer zones for floods and wildfires, climate-adaptive architecture, resilient MEP plants, independence or redundancy of utilities, and strengthening local supply chains.

According to Six Senses Vice President of Sustainability Jeffery Smith, “a growing number of our development partners are assessing climate-related risks during feasibility and pre-design stages. A related risk we are giving particular focus on is carbon fuel dependency, to reduce that with as much renewable energy production capacity as possible to ensure smooth operations well into the future.”

Adaptation and crucial carbon mitigation include energy efficiency and renewables. As a result, investment in measures in those areas presents multiple benefits: operational cost improvements, carbon emission reductions to meet corporate and regulatory targets and resilience to safeguard assets.

Ultimately, adaptation helps protect the investment and the surrounding communities and systems on which the investment depends. More than a growing regulatory requirement, understanding and addressing risks is good stewardship and good business.

Ricardo Moreira, managing director and co-founder, building services and environmental consultancy XCO2, London and Singapore

Note: The following contributed perspective was submitted through ISHC. The views and opinions expressed in this column do not necessarily reflect the opinions of Hotel Investment Today or Northstar Travel Group and its affiliated companies.