Why real estate investors are still hesitate to go green

Dunhill Towers along Waiyaki Way, Nairobi. [Phillip Orwa, Standard]

High costs are hindering real estate developers from adopting environmental, social and governance (ESG) practices in their operations.

A document by Reits (Real Estate Investment Trusts) Association of Kenya published by the Centre for Affordable Housing in Africa (CAHF) also cites the challenge of quantifying the benefits of ESG against returns.

ESG is an aspect of business where the involved firm makes decisions and carries out its operations with the view to protecting or preserving the environment and upholding social justice.

It is usually what guides developers in putting up green buildings.

The document says real estate developers and investors are adapting to ESG to positively impact their profits and shareholding, employees and clients.

It notes that it is becoming progressively important to understand and pursue ESG implementation in real estate projects globally as concern for the environment and awareness increases.

Yet investors in the sector seem to be unsure of the benefits that come with employing ESG.

Social sustainability

The document titled, Environmental Resilience, Social Justice and Collaborative Governance in Real Estate Development says developers must ensure environmental and social sustainability criteria are adhered to from sourcing of materials, building designs and technologies, human resources and external social and environmental impacts of their developments.

The association notes that one of the negative biases towards ESG that has stalled uptake is that it is perceived to increase the cost of development.

This cost could be quantified as financial and in time. "It would then be prudent if industry players would define how costs can be reduced while still ensuring sustainable developments," the document dated February 2023 reads.

The other major challenge is the relationship between adopting ESG practices and the expected returns from the investment.

The association says the social aspects are easier to qualify and quantify compared to the financial returns, which is usually the main concern for an investor.

It notes that within the industry, there is an inability to fully quantify the benefits of ESG on development in relation to the rate of return. "The social aspects are usually easier to quantify and qualify for the directly benefiting communities or the staff members although it does not directly translate to a quantifiable benefit for the investor or the developer," the document says.

"However, seeing as ESG seeks to promote responsible investing and development, this then remains to be a valuable criterion of assessment."

Beneficial value

The Reits Association argues that if ESG can be seen to contribute to the cost, revenue, or profit of any company, then it certainly can be termed as a beneficial value driver within the real estate sector.

"Although it may be difficult to undo what has been done in the past without ESG compliance, we can always look forward to ensuring sustainability," suggests the document. "However, repurposing and regenerating previous developments could potentially remedy any negative impacts that buildings may pose environmentally and socially."

It is argued in the document that ESG compliance to some extent can improve the value of an investor's property.

This is through ESG Property Certification which, the association said, can lead to higher property values and provides the potential for future mandating and regulations as this new way of doing business is becoming an area of focus for most governments. "Non-governmental bodies have also lent their voice to the ESG discourse, with the United Nations recently launching its 2030 Agenda for Sustainable Development," the document says.

"This speaks to the measures and targets of sustainability that countries around the world should aim at to protect the environment and the people." However, the biggest challenge is in legislation, the document notes.

"How can investors and developers ensure that their developments and assets are ESG compliant?

This remains to be the biggest challenge for ESG as it is still not a mandatory requirement for real estate developments." It notes that in Kenya, various policy and legislative documents speak to sustainability within the real estate sector.

Some of the laws that require mandatory disclosure of social and environmental impacts to be used in the measure of ESG include The Environmental Management and Coordination Act (1999); Occupation Health and Safety Act (2007) and the Consumer Protection Act (2012).

There are also policies that companies use to benchmark ESG such as the Kenya National Climate Change Action Plan, IFC Performance Standards on Environmental and Social Sustainability, UN Sustainable Development Goals, and the Global Reporting Initiatives Standards.

Even so, there are players who have voluntarily chosen to go the ESG way which the document has listed among them Dunhill Towers in Westlands which is certified as a green building by the World Green Building Council through the South African Green Building Council, and the Centum Real Estate, a developer, whose units incorporate the use of renewable energy.

"For instance, at their Two Rivers Mall project, they have established a 1.2MW solar plant which is envisioned to expand to 8MW to meet energy requirements at the development site," it states.

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