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08 December 2023

It's what The World is waiting for


By Sean Davidson

Individual developers of islands at Nakheel's The World must meet set environmental standards to qualify for project finance, an official has revealed.

They must prepare environmental impact assessments (EIAs) to comply with regulatory requirements and conform to a set of funding criteria known as the Equator Principles (EP).

The principles are the financial industry's benchmark for determining, assessing and managing social and environmental risks in project financing.

A project finance lender looks primarily to the revenues generated by a single project both as the source of repayment and as security for the exposure. The lending method plays an important role in financing development throughout the world.

Project financiers may encounter social and environmental issues that are complex and challenging, particularly in connection with projects in emerging markets.

The Equator Principles Financial Institutions – a group of prominent global financiers who formulated the EP – adopted the principles to ensure the projects they financed were developed in a socially responsible manner that reflected sound environmental management practices.

"Due diligence requirements that developers will need to demonstrate include the identification of both environmental and social impacts, measures to eliminate or manage the negative impacts and framework management plans to describe how these measures will be implemented," Brendan Jack, Head of Sustainability and Environment for The World, told Emirates Business. Developers must provide environmental baseline studies (EBSs) that benchmark conditions before they commence their activities. The studies must be more detailed if an island is to be reshaped.

Emirates Business reported last month that nearly 60 per cent of The World's islands are to be reshaped or merged.

Developers must conduct hydrological studies to demonstrate that the revised shape of an island will be stable – for example, that the beach sand will not move around too much – and that it will not affect the stability of neighbouring islands.

"They will need to have detailed management plans in place for both the construction and operational phases of their developments and ensure that these plans are cascaded through to subsequent buyers and leaseholders," added Jack.

He said the goals were not particularly difficult to meet and were regarded as the norm in regions and countries such as the US, the UK, Scandinavia, Canada and Australia.

"Until recently, the biggest challenge lay in securing consultants who could do the work quickly and cost-effectively. For example, to meet regulatory requirements EIAs can be done only by consultancies registered with the construction licensing body Trakhees.

"With the volume of work in Dubai there was a reasonably long time to get the work completed, but this situation has eased in the past few months."

The cost of meeting the environmental requirements will vary according to the size and complexity of the developments.

"Developers should consider these costs as an investment in sales and marketing where typical budgets would run into the multi-millions."

Nakheel has produced templates and guidance documents to help developers obtain project finance by meeting the EP requirements. The papers cover EIAs, EBSs, management plans and construction health and safety regulations.

"We brief and work closely with the developers' specialist consultants to achieve the desired outcome. We also work closely with Trakhees to support them in the development of regulations and processes commensurate with the unique nature of The World. This will help developers meet their regulatory compliance requirements as efficiently as possible."

The company also provides technical information from previous studies and access at or below market rates to specialists who can help expedite the process.

"With permission, Nakheel works with developers to spread non-sensitive information on better ways to meet challenges or alternative solutions that might fit a particular situation."

Most local and regional developers were not aware of the requirements to begin with but learned of them during initial discussions with Nakheel.

"On the other hand it is likely that international developers, or those who have worked with EP signatory institutions in the past, are aware of the requirements.

"At the outset developers may not have a full understanding of exactly what is required to comply with the EP, how long will it take and the upfront costs associated with compliance.

"It is important for developers to understand how the information they will gather from complying with the EP can be used to meet due diligence requirements. It can also be turned into an advantage to support project marketing and sales. Having solid data to dispel misinformation and criticism is critical as the buying public is becoming increasingly environmentally and socially aware.

"The World is a non-speculative project where buyers will be end-users and, therefore, will be interested in what is being done to protect the unique environment that they are buying into."

Nakheel will educate developers and their consultants by working closely with them and providing help and support.

"These measures are very, very important to the project. Its on-going success is inextricably linked with its sustainability – economic, social and environmental.

"The key benefit is a uniformly high standard of performance that all island investors can have confidence in. Nakheel's standards are high for all stakeholders in The World and the requirements, such as meeting the EP, are a part of that."

Asked if developers were trying to reduce the costs associated with the due diligence process given the current lack of liquidity, Jack said: "In today's climate, everyone is focused on achieving their obligations as efficiently as possible, so Nakheel encourages ideas on how costs can be reduced while still achieving the necessary performance standards.

"Efficiency, yes – cutting corners, no. All developers, including Nakheel, must continue to meet the sustainability requirements."

Representatives of environmental agencies in the region said it was encouraging that Nakheel had made environmental diligence mandatory for its developers.

The equator principle is a good standard for financing projects, said Habiba Al Marashi, Chairperson, Emirates Environment Group and board member of UN Global Compact.

"The EP is definitely a nice way of ensuring socially responsible investments. It will be ideal if local and international financial institutions operating in the UAE would all endorse the EP. The EP is also a major standard that the UN Global Compact is endorsing."

The Equator Principles

The Equator Principles are a set of nine criteria designed to ensure that projects funded or assisted by signatory institutions protect and enhance the social and environmental aspects of the local and regional area and community.

The EP categorise projects based on the expected extent of their impact and have differing requirements depending on the category of the project. The EP apply to projects worth $10 million (Dh36.7) or more. A total of 65 international banks and financial institutions are signatories – and at least 10 have offices in Dubai.

Other banks and institutions, which may not be signatories have their own social and environmental funding criteria. For example Islamic banks provide Shariah-compliant loans only for ethical investments, and some banks have extended their requirements to cover social and environmental factors.

As the EP are regarded as benchmark for project financing, Nakheel has included components from the principles that are relevant to The World in its development requirements.

Additionally, if developers wish to seek certain types of insurance, such as environmental impairment liability cover, they may need to satisfy further due diligence requirements.