Environmental, social, and governance related commitments are becoming increasingly commonplace in countless industries globally, even in industries such as real estate. Given the booming real estate sector of the Middle East, it’s important to explore how they are integrating sustainable practices into everyday operations. Countless stakeholders are impacted by the decisions that the real estate industry makes, including investors, builders, and buyers. A lot of sustainable trends have also impacted the Middle Eastern real estate market, such as green buildings, green financing, and sustainable cities and tourism.
Overall, many find it easier to fulfill the environmental aspect of the ESG as compared to social and governance. However, it is important to note that due to the geographical location of the Middle East, a lot of climate change factors pose a significant threat to the region, therefore affecting real estate greatly too. Transitional and physical risks are more likely to incur high costs as well. Procuring the material required for construction as well as the actual process of construction can lead up to 40% of the global carbon emissions, and this is without factoring in the increased demand for energy that will accompany the demand of more real estate. Governments in the Middle East are working towards establishing an introductory framework and guidelines to facilitate ESG compliance. In fact, in the run-up to the COP26 Climate Change Conference in Glasgow, the United Arab Emirates committed to net-zero carbon emissions by 2050 along with Saudi Arabia and Bahrain who also pledged to achieve net zero by 2060.
In the UAE, for example, it is well recognized that a hefty portion of energy that is produced is directed towards air conditioning and cooling systems. Due to the increasingly tangible effects of climate change, it has become increasingly important to ensure that these cooling systems are present and operational in all housing units on the market. One of the strategies that companies are choosing to approach this concern is to resort to sustainable sources of energy such as solar power, which is available abundantly in the United Arab Emirates. In fact, many new units that are being developed nowadays come with solar power panels on their roofs.
Many developers aim to achieve the social factor of the ESG through providing leisure spaces in the communities that they build. These could be in the form of bike tracks, parks, and restaurants, all of which would provide buyers a lucrative reason to stay in their developments. This would also align with the 3rd and 11th Sustainable Development Goal of the UN – Good Health & Wellbeing and Sustainable Cities and Communities. Furthermore, certain companies are working towards using as much as 48% less water in construction, as well as up to 30& recycled material.
In terms of the governance standards, a review in 2014 by the OECD highlighted that several countries in the region have issued governance codes and guidelines for banks, insurance companies, state-owned enterprises, securities companies, and small and medium sized enterprises (SMEs). As the ESG agenda advances in the Middle East, some banks in the region are beginning to screen their investment products and loan portfolios for climate impacts, illustrating how governance is in constant evolution in the region. Given that these guidelines and codes are issued by central banks, capital market authorities and corporate governance institutes, it is important to note that it will impact the level of investment in the real estate sector as banks would be more stringent of which companies they would lend to as per ESG standards. Companies are also implementing their corporate social responsibility through ESG, and the Deyaar Maintenance Program is one of those initiatives. Deyaar cooperated with RERA and the UAE Red Crescent in its ‘Colour Your Life’, where the DFM aided in the maintenance of the houses of underprivileged families.
Additionally, several studies have drawn links that exist between ESG performances and long-term profitability and financial resilience. As a result, more investors in the MENA region are considering ESG investing as the new way to approach real estate investing. In fact, it was estimated that by 2020, 94% of retail investors in the UAE would be interested in ESG investing. Moreover, the lucrative idea of smart cities and buildings, especially in Dubai, Riyadh and Doha, further draws attention to energy efficiency and sustainable building materials, strengthening the case for ESG investing in the real estate sector. Sustainable infrastructure provides a great ESG for issuers and investors in the Middle East. Some of these infrastructural elements include renewable energy generation, water and wastewater management systems.
Countless Middle Eastern countries are doing their part to integrate ESG into real estate to achieve tangible results. For example, Saudi Arabia’s investments in renewables and green infrastructure, such as through its mega-city project NEOM, have created an added incentive to develop green real estate in the region. The project aims to be a zero-carbon, sustainability-driven, human-centered project that would lead to a diversified economy. NEOM would place nature first and create an environment where the temperature would be 10ºC cooler than the rest of GCC, as well as provide access to solar resources perennially. It includes 3 regions:
- Oxagon: aims to be the world’s largest floating structure with high speed rail access to The Line and the NEOM airport and 13% of global trade passing through the Suez Canal
- Trojena: aims to offer year-round outdoor skiing and adventure sports to be completed in 2026. The city will also include a stunning man-made freshwater lake and ‘The Vault’.
- The Line: aims to accommodate 9 million people and will be built on a footprint of just 34 square kilometers. This will mean a reduced infrastructure footprint, creating never-before-seen efficiencies in city functions. The ideal climate all year round will ensure that residents can enjoy the surrounding nature.
The UAE launched its first sustainable real estate investment trust (REIT) with Emirates NBD Asset Management as an initiative to enable investing in sustainable real estate. Aldar Properties, an Abu Dhabi-based organization, has signed an AED 300 million facility with HSBC that links the interest margin payable under the facility to the achievement of sustainability targets. This innovative five-year term sustainability-linked loan includes a mechanism to adjust Aldar’s interest margin annually in line with the achievement of targets on energy and water intensity, waste recycling and worker welfare. These targets, which are aligned with Aldar’s sustainability strategy, were recognized to be crucial to the wider real estate sector as well. As part of the agreement, the company has also committed to investing a fixed amount in one or more qualifying environmental, social and governance (ESG) projects if it does not reach agreed annual targets. The loan will largely be utilized to support general corporate purposes, especially the roll-out of ESG initiatives across the Aldar group. Moreover, Aldar is setting the bar for real estate companies regionally by increasing its ESG ratings within two major global benchmarks, the Dow Jones Sustainability Index (DJSI) and Sustainalytics, driven by a broad base of progress and improvements across its core sustainability pillars comprising environment, community, people, and economic impact.
UAE’s Masdar City is also noteworthy while examining the extent of sustainable real estate and communities. As one of the world’s most sustainable urban communities, Masdar City is a low-carbon development made up of a rapidly growing clean-tech cluster, business free zone and residential neighborhood with restaurants, shops and public green spaces. Masdar’s philosophy of urban development is based on the three pillars of economic, social and environmental sustainability. The City is a ‘greenprint’ for the sustainable development of cities through the application of real-world solutions in energy and water efficiency, mobility and the reduction of waste.
Additionally, the UAE has devised a policy for Shariah-compliant assets to have significant potential to also be ESG-compliant (due to, for example, both investment approaches prohibiting investing in certain products and services). This can be done through Green or Sustainable Sukuk, where the proceeds of the issuance are used exclusively for the funding of eligible sustainability projects or to finance investments in renewable energy or other environmental assets. By adding this facet to a Sukuk offering, issuers can appeal to a broader range of potential investors – most notably, ESG-minded funds and socially responsible investors beyond the traditional Sukuk fixed-income investor space.
This would encourage Shariah-compliant investors to align with trends in the global markets which are increasingly conscious of the ESG implications of their investments. Whilst there have been relatively few sustainable or green Sukuk issuances in the region, awareness of and sensitivities to ESG factors are undoubtedly rising, with sustainability driving the strategic narrative of various sovereigns in the Middle East more than ever before.
At The One Percent, we work towards helping companies develop their ESG reports, along with their sustainability strategy. Given our international standing and high-quality service, we are the perfect fit for your company’s Sustainable IT Solutions, Environmental Consulting, ESG Advisory & Solutions, and Marketing and Business Advisory. Our ESG parameters align with your financial and business needs, adding sustainability and cost reductions to a pre-existing plan to increase profitability. Moreover, because of the rapid pace at which sustainable policies are becoming mandatory, it is crucial to work with an enterprise that understands your company’s position and targets.