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|CSR Asia: Asian real estate developers failing to manage ESG risks|
|Written by Ratna Devi|
|Thursday, 09 April 2009 10:14|
FEATURE ARTICLES; Vol.5 Week 14 08/04/2009
A recent report by Responsible Research finds evidence of poor environmental, social and governance (ESG) practices in real estate development in Asia whose buildings account for over 7 percent of total global energy use. Notwithstanding, a poor performance overall , the report does find that there are some Asian leaders are who include Swire Properties, Hong Kong’s MTR, City Developments and Siam Cement. The report points to their more sophisticated management and reporting systems.
As the current economic crisis forces investors to re-evaluate their traditional approach to assessing material industry risk and opportunity, the report, covering 50 Asian real estate companies, finds evidence of neglect for material risks associated with the environment, social responsibility and governance practices.
The report, commissioned by a major UK investor, identifies critical ESG factors and analyses how they can impact risk profiles of potential investments and affect company performance. The sector is of great importance to environmentalists as buildings are thought to be responsible for around 33 percent of global greenhouse gas emissions, and estimates state that Asian buildings account for over 7 percent of the world’s total energy use. The use of natural materials in Asian construction and water usage are also important issues.
The Asian real estate sector has always been a tempting choice for responsible, or ethical, investors who desire emerging market exposure. Companies have been extensively covered by mainstream analysts, and held by investors globally. At first sight the sector appears ‘cleaner’ than other emerging market investments, such as natural resources and manufacturing but, on closer inspection, there is very little public disclosure on environmental, social and governance practices. Over the long term, there is great potential for improving environmental, labour and governance standards, however, with the current economic downturn, the report predicts that this is likely to worsen as attention is diverted to short term margins.
This report is the first piece of research to specifically assess these important and material risk factors and the findings show that Asian companies significantly lag behind their counterparts in Europe and the United States. About half of the companies in the study do not disclose any relevant, business-related environmental or social information at all. Many of these issues are important material risks for companies in the real estate sector today but are being ignored by these companies. This is inconsistent with good due diligence and risks for investors as well.
Poor corporate governance, complicated government relations, bribery, corruption and land rightss can all have a direct impact on a company’s performance, as can non-compliance with labour standards for migrant labour and disputes over land clearance and resettlement.
The report observes that, with labour issues, there is little financial risk to companies, but possible reputational ones, as workers are mostly hired by agents via independent, outsourced construction companies. Companies should be encouraged to shoulder more responsibility in their supply chains for labour issues by setting higher standards for the hiring practices of their external contractors.
The report says that governance standards are expected to improve over time, but corruption is still wide-spread in the real estate sector and, in recent years, the report cites high-profile cases in Shanghai, Macau and Hong Kong have all involved listed companies.
Whist there is a discernable trend towards more regulation, with voluntary certification schemes in Singapore (the BCA Green Mark) and Hong Kong (BEEAM), enforcement is still lagging in most countries. Many of the governance and labour related issues are not included in such standards and due to a lack of awareness, proactive green building standards only have a limited impact as a differentiating factor among real estate companies.
In China the report highlights a systemic conflict between central government, local authorities and developers. Trends towards more transparency will most likely reduce margins in real estate as central government gets more serious about its economic priorities of social housing and sustainability. Given the high susceptibility of the real estate sector to act in collusion with local government entities, it is suggested that investors should undertake in-depth ESG background checks of companies they are considering as portfolio holdings. In particular the report recommends that responsible investors should engage with companies on a wide range of ESG issues and publicly acknowledge those companies who have demonstrated a willingness to tackle contentious issues and confront industry malpractice.
In India the report finds that the complex and sometimes chaotic legal situation around land use rights and the lack of transparency on companies’ land banks and on land prices gives rise to frequent irregularities. There is frequent public opposition to property development projects which can delay or stall them. The IPO prospectus of a recent offering of a property developer in India, for example, included more than 50 pages on pending litigation and material developments.
The overall message of the report is one of considerable concern. The fact that the majority of real estate developers are ignoring material risks is inconsistent with good management and the protection of shareholders. Although there are a handful of good examples cited in the report, most companies are failing to manage risks in the sector in an appropriate way. Such risk management is an important part of good corporate social responsibility and the lack of proper concern for the interests of shareholders is nothing short of a negligent.