Building toward sustainability: Green procurement in GCC real estate development

Decarbonization: both imperative and opportunity for GCC’s Built Environment  

By: Benjamin Deschietere , Edoardo Geraci , Shelly Kanhai Trench , Peter Jonathan Jameson Marianne Kaas Fürst Mohamad Kaivan

Decarbonization is both a critical need and an opportunity for the GCC's built environment. Countries are failing to keep global warming under 1.5 degrees Celsius (Exhibit 1). Berkeley Earth's data indicates that from January to December 2023, temperatures were 1.42°C higher than the 1850-1900 average for the same months.

Saudi Arabia’s temperature is predicted to increase more than the global average, rising 2.2°C,

2.9°C, and 5.6°C for global warming levels of 1.5°C, 2°C, and 4°C respectively. Immediate action must be taken to mitigate these effects.

The built environment is a major consumer of raw materials. It contributes significantly to waste and greenhouse gas emissions, accounting for approximately 35% of worldwide emissions (Exhibit 2). Tackling this issue is further complicated by the urgent real estate needs in emerging markets, where building and upgrading infrastructure is central to improving people’s standard of living.

However, increased development has typically led to more emissions. Such challenges often present opportunities, and in the Gulf region, these are unmatched: real estate projects worth $1 trillion USD are planned, many at stages where sustainable choices can be integrated. Regional governments, recognizing the importance of reducing emissions to combat climate change and improve living standards, need to focus on innovative urban planning, placemaking, and experience design. The region is poised to lead in creating greener, sustainable value chains and pioneering urban development, establishing a lasting legacy in progressive and more sustainable urban planning. Businesses, meanwhile, are tasked with executing specific actions to reduce their carbon footprint. Procurement is where these priorities meet, issues come to light, and solutions can be crafted.

Opportunity levers along the value chain

According to previous studies, the operations and maintenance phase of the real estate value chain is most carbon-intensive, generating 65% of total lifecycle emissions over a 50-year period (Exhibit 3). Materials manufacturing follows, contributing roughly 25% of lifecycle emissions. This includes energy- and fossil fuel-reliant processes in producing cement, steel, and aluminum. Material choice and operations are therefore pivotal focus areas in real estate decarbonization.

Strategies for reducing emissions include adopting low-carbon materials and integrating smart services, which typically involve procurement processes. However, procurement departments may not always be equipped or prepared to accommodate the new demands arising from a sustainability-focused strategy.

The main challenges of greener procurement

BCG’s recent work with a large-scale real estate developer highlights six key challenges that procurement departments face in implementing a green transition strategy (Exhibit 4).

1. Limited influence of procurement on environmental sustainability topics. One of the significant challenges is the procurement function’s limited capacity to influence environmental sustainability. This includes difficulties integrating sustainable practices into procurement decisions and influencing suppliers to adopt greener practices.
2. Unclear mandate for implementation of green initiatives. Organizations often lack clear directives or mandates for the implementation of green initiatives. This ambiguity can lead to inconsistencies in applying green practices across different projects and departments.
3. Low maturity of suppliers and availability of green materials in the region. Many parts of the world have a shortage of suppliers who can provide environmentally sustainable materials. Additionally, the overall market for green materials is still scaling up, making it challenging to source these materials consistently, at high volume and cost-effectively.
4. Need for additional green investment. The requirement for additional investment to procure green materials can be a barrier. This financial challenge can deter companies from pursuing environmentally friendly options, instead favoring more cost-effective, but less sustainable, alternatives.
5. Limited sustainability awareness. Employees might not be fully aware of the environmental impact of their actions or understand how they can contribute to sustainability goals in their roles. This gap in awareness can lead to missed opportunities for implementing sustainable practices in daily operations and decision-making processes.
6. Lack of sustainability culture within internal operations. Sustainability may not yet be a fundamental or ingrained part of company practices, policies, and ethos. As a result, sustainable practices might not be consistently applied or might be limited to certain areas or departments, rather than being a pervasive aspect of the organization's overall approach and strategy.

While all these challenges are applicable to developers in any geography and are part of a larger global pattern, a few are particularly salient in GCC, namely the low maturity of suppliers and green materials and a limited awareness of sustainability amongst employees. Both challenges can be addressed through emphasising the importance of sustainability for the future of the region and through executing concrete initiatives to encourage green procurement practices.

Concrete actions enabling the transition to green procurement

Fifteen concrete initiatives were designed to address these challenges to green procurement. They guide real estate developers to act across three areas: their procurement operating model, supplier interaction model, and internal operations (Exhibit 5).

Procurement operating model. The objective of the revamped procurement operating model is to seamlessly incorporate sustainability into every stage, from the initial design to the final delivery. This holistic approach ensures that environmental considerations are embedded in all documents and guidelines. Initiatives to achieve this include:

1. Developing a Sustainability Strategy and policies. This foundational step involves developing an overall Sustainability Strategy to articulate the organization’s direction and translating it into tangible policies. These lay the groundwork for adopting Sustainability Procurement Guidelines (below). More broadly, a clear Sustainability Strategy and polices help to embed sustainability as a core part of the company's ethos.
2. Creating Sustainability Procurement Guidelines and updating procurement materials. This involves defining specific sustainability requirements for each project phase (design, construction, operation) and asset type. These guidelines will shape Pre-Qualification Questionnaires (PQQs) and Requests for Proposals (RFPs), ensuring that sustainability is a cornerstone of every project. Existing PQQs and RFP packs should also be updated to standardize the inclusion of sustainability across various procurement templates and plans.
3. Modifying the procurement process. A vital step is to formalize the role of sustainability in the procurement process. This includes integrating the sustainability and procurement teams into the preparation of business cases, and establishing a formal approval step from the sustainability team for final tender materials, like PQQs and RFPs.
4. Enhancing sustainability review in the Design stage-gate. Strengthening the sustainability review of designs before sign-off is essential, particularly with a focus on materials expertise. This step ensures adherence to sustainability best practices within the local context.
5. Strengthening post-contract monitoring. It’s important to establish robust systems for monitoring supplier compliance with sustainability standards. This includes regular sustainability reports, biannual meetings with key stakeholders, strengthened audits of monitoring documentation, and quarterly site visits by sustainability representatives and Quality Assurance/Quality Control (QA/QC) teams.

These suggested initiatives form a comprehensive approach to embedding sustainability in procurement operations, ensuring that every aspect of the process contributes to a greener future.

Supplier interaction model. A vital aspect of advancing sustainability in the real estate value chain is the active involvement and incentivization of suppliers. Initiatives to achieve this include:

1. Involving suppliers in Design. Involving contractors and material suppliers in the design phase is central to ensuring the feasibility of planned designs before they are finalized. In the case of governmental organizations subject to public procurement laws, a novel approach is to pre-qualify potential contractors and material suppliers to involve them in the design phase within the bounds of the law. By inviting such suppliers to design workshops, their insights on the market feasibility of design options, such as building materials and product types, can be incorporated.
2. Setting up incentivized supplier agreements. Establishing agreements with key green material suppliers is crucial. These agreements aim to lower costs and ensure access to essential materials for contractors and developers, using the size of the development as a business incentive for supplier cooperation. This strategy is designed to foster a more sustainable supply chain, allow suppliers to scale up and encourage the use of green materials.
3. Facilitating favourable financing for developers. Partnerships with financial institutions can provide developers with access to favourable financing options, including green loans and green letters of credit. These green financial products help offset the costs of sustainable investments, offering better terms or interest rates for projects that meet environmental sustainability criteria. By supporting projects like renewable energy developments or sustainable procurement, green letters of credit can help ensure both financial security and adherence to eco-friendly standards.
4. Launching supplier cost benchmark workshops. Hosting cost-benchmark workshops with developers prior to RFX submission assists in accurately costing green bids, reflecting market prices and avoiding inflated costs typically associated with green initiatives.
5. Implementing supplier ESG training and support. Conducting Environmental, Social, and Governance (ESG) training for all suppliers can help educate and level-set around sustainability as part of the national vision, incentives, financing, and health and safety mandates for all suppliers. They can also be used to enhance understanding of market capabilities, for example by providing an overview of local green material suppliers.
6. Publicly recognizing green suppliers. An effective way to encourage sustainable practices is through public recognition. Suppliers who excel in this area can be acknowledged and rewarded through various channels including the company/supplier website, social media, public forums, and press releases.

These initiatives collectively represent a holistic approach to integrating sustainability into the supply chain, not just through mandates and regulations, but also through encouragement, education, and meaningful incentives.

Internal operations. Integrating sustainability into the daily operations of a company involves a comprehensive approach that affects every aspect of the business. Here’s how this can be effectively achieved:

1. Incorporating sustainability into personal KPIs. Embedding sustainability targets into employees’ personal Key Performance Indicators (KPIs) ensures that an individual's contribution to sustainability directly influences their compensation and benefits, motivating them to prioritize sustainable practices.
2. Enhancing corporate and employee sustainability. Initiatives can be launched to cultivate a culture of sustainability within an organization. Examples include a dedicated Sustainability Week, the introduction of green elements into the office workspace (e.g., living plant walls, botanical displays, and sustainable packaging), recycling, green chargers, and Farm2Table programs. Additionally, employees can be encouraged to participate in community environmental activities like tree planting, local area clean-ups, or sustainability-themed exhibitions. Such initiatives should be repeated regularly to maintain engagement and demonstrate ongoing progress in sustainability efforts.
3. Introducing sustainable employee recognition programs. Recognizing employees for their involvement in sustainability initiatives is crucial. This could be through awards, points, or other forms of acknowledgment, creating a culture that values and encourages sustainable actions.
4. Promoting green corporate mobility. Initiatives like sponsoring bike-sharing subscriptions for employees, installing electric vehicle chargers, and transitioning to electric company vehicles further embed sustainability in everyday activities. This not only reduces the carbon footprint but also sets a precedent for eco-conscious commuting.

By implementing these initiatives, a company not only commits to sustainable practices at a corporate level but also creates an environment where each employee's actions contribute significantly to a more sustainable future.

Examples from Saudi Arabia and the United Arab Emirates

It is inspiring to see real-world examples where these approaches are being brought to life in GCC real estate procurement. Two notable instances are an urban regeneration plan in Riyadh and a Real Estate developer in UAE, both of which demonstrate a commitment to sustainable development and procurement.

Urban Regeneration plan in Riyadh: a model for sustainable lifestyle and procurement

This Saudi developer’s major urban regeneration project in the Saudi capital of Riyadh highlights a commitment to healthier lifestyles and environmental responsibility. Recently, the project adopted a comprehensive strategy to enhance its supply chain, focusing on sourcing materials and services that align with its sustainability ethos. By implementing green procurement initiatives, such as developing a detailed Sustainability Policy and updating their RFX templates to ensure the inclusion of clear sustainability requirements, the project is not just creating a healthier city, but also ensuring that its impact on the environment is minimized. This move marks a significant shift towards sustainable development in the region, setting a benchmark for others to follow.

Real estate developer in UAE: pioneering sustainability in real estate development

A leading real estate developer in UAE has made significant strides with its Sustainable Procurement Policy. This policy underpins its commitment to environmentally responsible practices, focusing on eco-friendly sourcing and advancing green technologies. It emphasizes collaborative efforts with suppliers toward shared sustainability goals, transparent sourcing, and considering the entire lifecycle of materials.

By integrating this policy into its procurement processes, the developer has reinforced sustainability as a core aspect of its business ethos. This approach shows how environmental stewardship can align with development ambitions, setting the company apart as a leader in sustainable real estate development both regionally and globally.

These examples illustrate the significant progress being made in the GCC region towards integrating sustainability into the real estate sector. They highlight the industry’s potential to not only contribute to economic growth but also play a crucial role in environmental conservation and sustainable development.

Importance of stakeholder collaboration

The transition to green procurement in the real estate sector necessitates a concerted effort from all stakeholders. This collaboration is not just a requirement but an opportunity for each entity to contribute meaningfully to the goal of sustainable development.

Developers. By aggregating demand across projects or even companies to create significant volume, developers can leverage their purchasing power to influence the market, encouraging the production and availability of green materials. This collective demand can generate economies of scale, making sustainable options more financially viable.

Contractors. In adopting green construction methods, utilizing sustainable materials, and ensuring compliance with environmental standards, contractors play a critical role in implementing sustainable practices on the ground. Additionally, contractors can innovate in waste reduction and efficient resource utilization on construction sites, further contributing to the sustainability of projects.

Building Material Manufacturers. The onus is on manufacturers to revolutionize their production processes. Developing new technologies to decarbonize products is crucial. This involves investing in research and development to find eco-friendly alternatives to traditional building materials. Manufacturers are also expected to ramp up the production of green materials to meet the growing demand, ensuring that these sustainable options are accessible and affordable.

Banks and Financial Institutions. Financial institutions play a critical role in the green procurement ecosystem by providing the necessary funding to support sustainable projects. Through innovative financial products such as green bonds, green loans, and green letters of credit, banks offer developers and contractors access to capital at preferential terms. These financial mechanisms are often linked to sustainability metrics, encouraging all parties to align with environmental goals while reducing financial risks. By backing eco-friendly projects, these institutions help drive the real estate industry towards broader adoption of green practices.

Governments. The role of governments is pivotal in harnessing the aggregated demand for green materials and asserting global leadership in green construction and related sustainable practices. This involves not just updating national codes and standards to promote the use of sustainable materials, but also creating incentives and financial mechanisms, such as green bonds, to encourage investment in eco-friendly real estate projects. By strengthening regulatory requirements and setting ambitious sustainability targets, governments can steer the real estate industry towards a greener future. This proactive approach offers governments the chance to lead the charge in global sustainability efforts, showcasing their commitment to environmental stewardship and positioning their countries as frontrunners in the adoption of sustainable building practices.

By working together, these stakeholders can create a robust and sustainable real estate ecosystem. Developers, contractors, manufacturers, and governments each have a unique role to play in this transition. Their collective efforts can lead to significant strides in reducing the environmental impact of the real estate sector, paving the way for a more sustainable future.

Conclusion

The GCC real estate sector is making strides in sustainability, recognizing the high emissions from building materials. Developers are implementing strategies for sustainable design and sourcing, as seen in the examples above. But ongoing success in green procurement hinges on collaboration among all stakeholders: developers driving green material demand, contractors practicing sustainable construction, manufacturers producing eco-friendly products, and governments crafting supportive policies.

This collective approach not only addresses environmental concerns but could also position the GCC as a global leader in sustainable real estate. Combining economic growth with environmental responsibility, the region can set a global benchmark for sustainable development. This commitment to green procurement marks a significant step towards a more sustainable and prosperous future in the GCC.

[1] Real Estate Future Forum - A Bolder Path to Net Zero: Decarbonizing Saudi Arabia’s Built Environment 

[2] Real Estate Future Forum - A Bolder Path to Net Zero: Decarbonizing Saudi Arabia’s Built Environment

[3] BCG analysis for an urban-mega development in Riyadh

[4] BCG analysis

[5] BCG analysis