The discourse in the Africa Climate Summit recently concluded in Nairobi (October 2023), Kenya confirms that proper assessment of climate change-related contingencies is bound not to be just a trend, but a necessity. Today, real estate, banking and finance practice is characterized by an increasing demand for more climate-resilient projects and developments.
In terms of financing, for instance, the nature of current and future transactions will require a complete rethink of the contractual clauses that govern party-to-party relationships. Sustainable financing will be pivotal in promoting climate resilience within the real estate sector. As such, the climate imperative necessitates the incorporation of environmental and social considerations into real estate transactions, agreements, and lending practices.
It is expected that projects coming up in the future shall be more climate-resilient, especially in the Global South.
One such project that heralds the dawn of a climate finance-dependent era is the African Greenhouses Monitoring Station that was set up by the Advanced Global Atmospheric Gases Experiment (AGAGE) in Rwanda at Mt. Mugogo. This project has been set up to monitor greenhouse levels in the Equatorial African belt, providing data based on internationally recognized quality standards. Such projects are inevitable in Africa given the significant CO2 emissions arising from agriculture, biomass burning and land use changes, as well as methane emissions emanating from wetlands in the Global North. The projects set up will go a long way in quantifying the global budget of CO2 and Methane integral for the calculation of the resulting radiative forcing needed for climate mitigation policies.
We also foresee an expansion of the scope of force majeure clauses. Increasingly, we see frequent and severe weather events, such as floods, storms, and wildfires, that can damage or destroy properties and generally affect their values resulting in financial losses for owners, lenders as well as insurers.
On this basis, therefore, the scope of due diligence for development projects is expected to expand to include an assessment of climate-related risks. This involves the evaluation of the property’s vulnerability to the impact of climate change, its insurance coverage as well as whether it complies with domestic and international environmental regulations. By proactively addressing climate risks in real estate transactions, lenders and property owners can reduce the likelihood of financial losses.
This dynamic also means that the governing laws and dispute resolution clauses within contractual arrangements will go through major changes. Novel disputes are bound to increase in the context of carbon trading and pricing as well as new renewable energy investments. In fact, climate change-related disputes arising from climate change commercial contracts are well on course. To demonstrate the magnitude of the expected disputes in the era of climate change, according to the International Chamber of Commerce (ICC), disputes related to construction/engineering and energy historically generate the largest number of ICC cases. As of 2017, energy arbitration cases accounted for 24% of all cases in the London Court of International Arbitration. Thirty-four per cent of all Defendants in the Arbitral proceedings stemmed from the energy and natural resources sector. The trend was confirmed in 2020 with 194 and 167 cases respectively, accounting for approximately 38% of all cases filed in that court.
This statistical data also implies that there is a need to ensure regulatory compliance owing to the evolving legal frameworks necessitated by climate events. This includes disclosure and transparency to ensure that buyers are informed about potential climate-related challenges that may be associated with a property. Similarly, by proactively addressing climate risks in real estate transactions, lenders and property owners can reduce the likelihood of financial losses.
Yet, climate change does present more opportunities for proper integration of property transactions. Green mortgages, for example, are geared towards incentivizing property buyers to invest in energy-efficient or climate-resilient features by offering preferential terms, such as lower interest rates or longer repayment periods.
For developers, properties with sustainable features often command higher market values. The International Finance Corporation (IFC) estimates that investment in green buildings in emerging market cities will reach USD 24 trillion over the next decade alone, implying a high demand for green construction finance. Therefore, embracing sustainable financing practices can make real estate transactions more attractive to environmentally conscious buyers.
Given the fast-evolving practice landscape, all industry actors will need to adopt more climate-resilient steps geared towards contributing to more sustainable and secure real estate investments.
We have seen examples of projects being denied licensing because they are polluting the environment. We expect to see that Kenyan banks will more and more be inclined to finance projects that are energy efficient.