A clean start

10 August 2007

Businesses in the region are appealing to governments to get tougher on polluting companies. MEED surveys corporate climate change across the Middle East.

A yellow hue increasingly dominates the Dubai skyline, and no one believes that it is caused by sandstorms any more.

‘Are we properly dealing with dust suppression on site? We are not,’ says one survey respondent who is the director of a major construction firm. ‘There is a great lack of understanding surrounding environmental issues in this business. Even the guys managing the job do not realise that it [dust] causes a massive blight. We only learn if the rules tell us that we have to. Law is the key driver.’

Environmental issues have risen up the corporate agenda in recent years, as understanding of climate change evolves. In 2006, the Intergovernmental Panel on Climate Change concluded that human activity was the likely reason for rising sea levels and increasing temperatures. As temperatures have increased, so has the world’s conscience. ‘Twenty or 30 years ago, Greenpeace were outlaws; now they are totally accepted,’ says one respondent.

Such views are not unusual: 84 per cent of respondents to MEED’s environmental sustainability survey agree that behaving in an environmentally sustainable way should be a legal requirement (see chart). ‘We need more legislation,’ says another company director. ‘There is no other way. If laws do exist at present, they are not enforced.’

The call from business for governments to introduce and enforce new laws is rare. ‘It is a unique turnaround when business asks for intervention,’ says Dax Lovejoy, business and industry engagements adviser at the World Wildlife Fund (WWF). It was the WWF that turned the eyes of the world to the Middle East in 2006 when its Living Planet Report revealed that the region’s ecological footprint which compares the demand placed on natural resources with the earth’s capacity to regenerate them was the highest in the world per person.

‘If businesses in the Middle East are coming back with this response, perhaps they should form a consortium and engage local governments,’ says Lovejoy.

Businesses could well do this. MEED’s survey shows that the drive to improve environmental performance is preying on the collective mind. A massive 99 per cent of respondents say that business has an obligation to behave in a sustainable way.

But when price is the key driver for a contract being awarded, doing the right thing by the environment falls by the wayside. Without legislation covering their rivals, firms say they will not be operating on a level playing field.

There are plenty of areas, including waste management, reducing energy use, controlling pollution and using sustainable building materials, that respondents say would benefit from tighter regulation.

‘Unfortunately, there are no laws covering domestic waste at the moment, but this has been the topic of much discussion recently,’ says Kathryn Hanson, commercial director at global waste services company Envac. ‘Major developers are increasingly using our services to encourage separation of waste at source. There are certain developers such as Emaar Properties, through its Earthwatch scheme, that are providing options for waste management within their buildings, but there is no monetary incentive for users to do this.’

It is not just the construction industry that is affected. ‘There should be regulations controlling emissions, but this is a sensitive issue,’ says one respondent working in the oil sector. ‘A carbon emissions trading system, like that operating in Europe, is a good model.’

Extensive environmental legislation is enforced in the EU for everything from water and air quality to waste recycling and the use of landfills. Non-compliance is met with heavy fines levied on governments, which in turn ensures they enforce the law. More than one respondent says similar laws should be introduced in the region.

‘A strong legal framework offering a ‘carrot and a stick’ to companies is needed,’ says the manager of a real estate business. ‘There are a lot of ‘dirty’ industries here and more are proposed, given the region’s relative cost advantage.’

Others agree. In the survey, 91 per cent of respondents say that governments in the region should introduce incentives to encourage environmentally sustainable business practices. The sort of ‘carrot’ respondents think would work varies enormously, from training to a free recycling service, to being given preferential treatment in government tenders. Several respondents suggest that companies should be graded according to their environmental practices, with awards and cash prizes for the best performers.

‘Governments should bear half the cost of being ‘green’, some sort of subsidy system should be introduced,’ says one executive.

Others focus on taxation, saying that import tax should be reduced on low-emission engines, landfill tax should be increased, and a carbon tax should be placed on petrol and gas. There are calls from several for renewable energy alternatives to be subsidised.

‘Above all, they should not just make rules but make sure they are enforced, so that the cost of not abiding is actually seriously discouraging,’ says one.

The suggestions are plentiful and some occur repeatedly. One suggestion supported by 88 per cent of respondents is the introduction of a carbon trading system. Such a system typically involves the government setting emission limits for companies. If a company manages to keep its emissions below these limits, it gains credits that can then be sold to other companies who have exceeded their targets.

Developed countries that signed up to the Kyoto Protocol have already implemented emissions trading for carbon and other greenhouse gases, creating a market that the UN estimates to be worth $30,000 million a year. By 2012, these national trading systems are expected to go global. It is a market the Middle East could be part of (see Special Report, page 28). The new global markets are expected to operate in sectors, rather than the current practice of setting country limits. This would allow oil companies to trade with other oil companies, for example.

Despite the strong level of support for a Middle East emissions trading market, only 62 per cent of respondents say they would take part. For some companies, especially those in service industries such as consultancy, law and accountancy, the scope for emissions reduction is limited. But for others, such as oil and gas, construction and power firms, it is enormous.

Some companies are already acting to reduce their carbon footprint. ‘Our company has worked to become carbon neutral inter-nationally,’ says one respondent. ‘This has been achieved through changing work practices, such as using recycled paper, printing on both sides of paper, using biodegradable cutlery and packaging in staff restaurants, installing energy-saving light fittings, and providing facilities for recycling cups, paper, plastics and cans.’

But for every firm already engaged in environmentally sustainable business practices such as reducing their carbon footprint (see box, page 5), many others claim they are thwarted from doing more when it comes to bidding for work.

‘It all comes down to price and it costs more to be ‘green’,’ says one construction company boss. ‘If there were requirements for environmental performance for either the project or us as a company, then all tenderers would have to step up and it would be a level playing field.’

The onus for introducing such performance criteria falls on major clients such as Dubai-based developer Nakheel, the state-backed company behind the Palm Jumeirah and Palm Jebel Ali developments, which have been widely criticised for their environ-mental impact.

‘We see our role to actively guide and educate the Nakheel workforce and local industry in the drive towards sustainability,’ says Shaun Lenehan, senior manager in the company’s environment department.

Nakheel says it is the only developer in the region to have an in-house environment team. Although it has environmental management requirements, which all contractors and suppliers must follow to minimise the environmental impact of projects, it does not make any demands on the corporate performance of its supply chain. But then, no one in the region does.

With much of the region’s economic activity still dominated by government-owned firms, many want the state to provide an answer.

‘Preferential treatment in government tenders perhaps evaluated through a ‘green’ rating could work,’ suggests one respondent.

Others say that sustainability criteria going above and beyond the current practice to protect marine environments and prevent harm to humans should be worked into tender documents.

‘New materials that are less polluting, easier to recycle and more environmentally friendly are more expensive,’ says a construction manager. ‘These will not get used without either legislative support or making it a strict requirement at the time of bidding.’

Another option would be for governments to give grants to support the use of such materials. However, most respondents say such incentives will not be as effective as regulations.

In the longer term, is it too easy to ask the government to make it happen through regulation? Can business afford not to behave in a sustainable way?

‘The world environment will not be changed or bent by government, it will come down to pure capitalist forces,’ says a banking director.

He argues that in the long term, oper-ating in an environmentally sustainable way could become a trade issue, with developed countries using it to try to protect their businesses from emerging economies such as China and India.

‘In the longer term, importers will lobby to say ‘we are getting hammered on cheap imports’, but these imports could be taxed call it a green tax,’ says the banker. ‘There are many sanctions that can be imposed to hurt a country. It is better for us to play an active part now than have a tax slapped on us later.’

For Middle East companies, learning to act in an environmentally sustainable way now would stop them being squeezed out of markets in the developed world by such taxes.

Other respondents agree that market forces will eventually prevail. ‘Sustainable environmental change can only be achieved through market forces,’ says Stephen Tolle, director of the Gulf Society for Organisational Learning, a non-profit group that encourages business innovation and is based in Dhahran, Saudi Arabia.

Such pressures are likely to be felt by all industries, including the region’s largest: the oil and gas sector. Industry insiders say that international pressure and market forces will force national oil companies (NOCs) to clean up their act and use technologies being implemented by international oil giants (see Special Report, page 34). Indeed, in the UAE, the Abu Dhabi National Oil Company (Adnoc) and Abu Dhabi Water & Electricity Authority (Adwea) have signed up to the emirate’s Masdar initiative, which aims to cut carbon emissions and adopt international best practice from the likes of the UK’s BP, the UK/Dutch Shell Group, and the US’ Occidental Petroleum Corporation and GE.

The WWF’s Lovejoy says NOCs have other opportunities. ‘Companies can generate business by selling energy services instead of just oil and gas,’ he says. ‘We are a long way from this, but it has to be the funda-mental challenge.’

The organisation is encouraging oil companies to increase their investment in renewable energy and work more closely with other businesses, such as the automotive sector, on reducing demand. Asking a business to encourage consumers to use less of its product flies in the face of standard corporate strategy, but Lovejoy says oil companies could mitigate any losses by developing other, renewable energy sources.

Survey respondents working in the hydrocarbons sector are less optimistic about the likelihood of such ambitious activities coming to fruition, but respond more positively to the idea of employing energy-efficient technologies and reducing their own consumption of natural resources.

‘In Saudi Arabia, we are looking at using low-energy-intensity technologies. Right now, this technology is not being used, but this will change as the new economic cities are constructed,’ says a respondent, referring to the new developments in Rabigh, Hail and Medina.

‘As the world’s largest energy producer, Saudi Aramco will no doubt come under increasing pressure to demonstrate responsible environmental stewardship,’ says Tolle. ‘The company has already taken the lead in the Gulf region in protecting the marine environment and in establishing standards for controlling industrial emissions. It could assume a similar leadership role among the national oil companies in reducing greenhouse emissions through energy-efficient design.’

Market forces may well eventually govern environmental performance, but in the Middle East these forces seem to need a kick-start. Enforcing environmental protection through legislation, or the introduction of commercial incentives, could be the catalyst that businesses need. As 94 per cent of respondents say that environmental concerns will become more important to businesses in the future, the case for governments to listen now is clear.

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