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1 SEP 2019

Accelerating investments into ‘green’ assets

The United Nations forecast that by 2050, the global population will increase to ten billion people; of which two-thirds will be looking to live in cities. This will add unprecedented pressure to cities, leading to an increased demand for food, energy and water (UN DESA).

In a rapidly urbanising world, the real estate industry lies at the centre of an unprecedented level of growth and activity. Over the next fifteen years, sustainable infrastructure to address the growing demands of the urban population will require an investment of US $90 trillion, as detailed in the New Climate Economy Report.

Given that the enormous task of financing may be difficult to achieve through commercial banks, we need to optimise the flow of investment into ‘green’ assets from all sources. A huge opportunity exists for investors from this growing market, so what is holding back investment in green assets?

Definition – what does ‘green’ mean?

One of the biggest barriers faced by the industry globally is the lack of a common definition of ‘green’ and what qualifies as green investments.

According to the Organisation for Economic Co-operation and Development’s (OECD) Policy Framework for Green Infrastructure Investment, green ‘investments’ refer to assets that are in some way defined as ‘green’. These can include a renewable energy company, a thematic green fund managing assets, or a carbon credit. However, green investing can also be undertaken in the form of an investment overlay, such as the integration of climate change of environment, social and governance (ESG) elements in the general investment approach.

Further work on the definition and measurement of ‘green investments’ is needed to facilitate a common understanding among institutional investors and governments.

Standards – inconsistencies and a lack of investor confidence

There is a crucial need for having green asset standards in place, allowing for benchmarks to be put in place, reducing inconsistencies and increasing investor confidence. Common standards are essential for market development, delivering transparency that reduces reputational risks.

Recognition and adoption of such standards is also critical, given the global nature of capital flows. Widely accepted industry standards can also reduce the risk of unsuitable projects being financed through Green Bonds (a bond specifically kept to be used for climate and environmental projects).

Various countries and institutions have set their own rules for the valuation and labelling of green assets.  However, the diversity of this leads to difficulties in comparing business process and performance metrics to industry best practices.

Government involvement - policies and incentives

To develop opportunities for sustainable investment, government policies that introduce incentives to lower capital costs for sustainable projects are fundamental. With the drive to fulfil its commitment to the UN’s sustainable development goals (SDG), the UAE government is urging financial institutions and companies to contribute as well. Some of the key initiatives include:

  • In 2016, a Dubai Green Fund of 100 billion AED was established by the Dubai Electricity and Water Authority (DEWA) to finance environmentally-friendly projects at favourable interest rates.
  • In 2017, First Abu Dhabi Bank issued the regions first green bond worth $587 million over five years and has set aside $10 billion for financing green businesses over the course of ten years.
  • As part of the Dubai Declaration of 2018, the first World Green Economy Summit took place in the city to put emphasis on green capital.
  • In January, the Abu Dhabi Global Markets signed a declaration with 25 signatories, committing to driving sustainable finance and investment

Although the UAE has government policies and incentives in place, there is still work to be done. According to KPMG’s 2017 UAE survey of corporate responsibility reporting, only three of the country’s top 100 companies by revenue met the scoring criteria of understanding, prioritising and measuring the SDGs.

Continuous encouragement and promotion of sustainable projects and the use of technology to reduce construction costs through government schemes can go a long way in attracting investors.

Technology – boosting transparency

Technology plays a significant role in sustainable development; from increasing lifetime savings to collecting data that helps make future strategic decisions. Availability of and access to comparable data that can be collected through intelligent sensors allow investors to manage risk. The use of technology, such as ‘smart sensors’ in green assets, can encourage a collaborative and transparent environment.

These wireless sensors provide accurate, real-time information, giving a more holistic view of the operating environment. The real-time feedback and analytics can identify trends and deliver insights to the asset managers to drive improvements and reduce disruption, thus increasing investor confidence in said green properties.

Shaping the Future

Sustainable property investments have developed from a niche concern, to a mainstream product for new real estate developments and investment products.

Governments and cities need to continue to establish and adopt sustainable long-term policies which incentivise real estate investors to support such initiatives. It is now becoming crucial to consider our natural environment and actions the profession can take to safeguard the future.

This article was originally written by RICS EMEA Managing Director, Robert Jackson, for the upcoming Cityscape Global.  At this year's Cityscape Conference, taking place on 24 September, RICS Thought Leadership Partnerships Manager, Samer Bagaeen will also discuss 'Accelerating green cities: The role data and finance play in this transformation'.

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