As ethical investing gains traction, the principles of Environment, Social, and Governance (ESG) are expected to become increasingly important in the construction industry.
The MENA region’s role in mitigating climate risks was emphasized during the COP 27 climate event held in Egypt last year.
In anticipation of the upcoming COP 28 event in Dubai, preparations are shedding light on the UAE’s persistent efforts over the last five years to promote ESG awareness at all levels of the economy.
In recent years, the UAE’s real estate and construction sectors have made a concerted effort to adopt ESG principles.
ESG in real estate
Investors and end-users are increasingly calling for a more sustainable built environment, driving the demand for ethical and ESG-compliant investing in the UAE.
According to an October 2022 report by real estate consultancy Knight Frank, commercial buyers, and tenants are emphasizing the importance of sustainable office spaces. Respondents believe that actively addressing the climate emergency helps attract and retain talent.
Read: Technology can support delivery of ESG in construction
Real estate developers in the UAE have also begun embracing green financing, recognizing the growing role of ESG-compliant investing in the post-pandemic economy.
In August 2021, Dubai-based developer Majid Al Futtaim became the first privately owned corporation in Dubai to borrow through a $1.5 billion (AED5.5 billion) sustainability-linked loan. The five-year credit facility includes a gender diversity goal and requires the developer to certify all its malls as LEED Gold or higher facilities.
Similarly, in July 2021, Abu Dhabi’s Aldar signed an $81.7 million (AED300 million) sustainability-linked loan with HSBC, becoming the first real estate company in the MENA region to do so.
The five-year loan adjusts Aldar’s interest margin annually based on targets for energy and water intensity, waste recycling, and worker welfare. The deal also requires Aldar to invest a fixed amount in qualifying ESG projects if it fails to meet annual targets.
In January 2022, Aldar committed to powering all its assets using clean energy sources from Emirates Water and Electricity Company for up to five years.
Supply chain considerations
Widespread support from the construction sector is crucial to drive ESG adoption in the UAE’s construction industry. This will likely involve equipping future professionals with the necessary skills to achieve ESG compliance on projects.
“With the advancement of ESG and sustainability criteria, there’s obviously a shortage of practitioners in that space, whichever element of the sort of supply chain they’re in,” says Saeed Al Abbar, CEO of AESG.
Al Abbar told Economy Middle East the industry is at an “inflection point,” with sustainable construction being prioritized amid government commitments toward net-zero and decarbonization.
“These commitments make it very clear that this is the way that the regulations are going to be heading. What’s also been a driver is the flight of capital and finance towards ESG, or Paris Agreement-linked investments. And that’s not just in construction, but across the board,” Al Abbar says.
“What we may also see is third-party verification of sustainability claims and ESG at the highest levels to substantiate claims around, say, carbon emissions. We may also see finance and auditing specialties pivoting towards carbon accounting. There is a lot of rigor and accountability in that space because there’s going to be financial and legal implications towards carbon emissions,” he adds.
Considering the practical requirements and impact of ESG compliance is crucial from an execution perspective.
According to Barry Lewis, Managing Director of Construction at ALEC, despite there being “massive awareness around ESG,” it is essential to integrate these targets into the entire project life cycle. This commitment must be reflected in the project’s design, specifications, and execution parameters, including waste management and defining how contractors measure their carbon footprints.
Outlook
ESG investing is expected to continue its upward trajectory in the MENA region, according to financial services provider Ocorian.
Private clients are leading growth in ESG investments as the region undergoes a generational shift.
“We’re seeing a generational shift which is resulting in far-reaching changes in how private clients operate,” says Lynda O’Mahoney, global head of business development for private client division at Ocorian.
This includes “everything from their investment outlook and a rising trend in impact investing and ESG through to how they are structured and a professionalization of the family office,” she says.
“These new trends are very exciting but can also bring new challenges, such as making sure that investments are both achieving target returns as well as the desired ESG credentials.”
For more on ESG, click here.
