Last week, the U.S. Securities and Exchange Commission (SEC) announced new rules to strengthen and standardize climate-related disclosures among publicly traded companies. The rules will be phased in so that the largest companies or publicly traded stocks will be required to begin disclosing climate risks in 2025.
“We've been waiting a long time for this to understand what the SEC is going to require of public companies,” said Marta Schanz, co-executive director of the ULI Randall Lewis Center for Real Estate Sustainability. “From our perspective, climate risk is a financial risk, so we think it's critical for business success for the real estate industry to think about climate risk, and for companies to understand both the physical and transition risks associated with their operations.”
“The SEC's ruling is important because it sends the right signal about one of the most significant risks facing our industry,” said Brenna Walraven, president and CEO of Corporate Sustainability Strategies Inc. “Having consistent, comparable, and decision-useful information about the risks and opportunities associated with climate change will help investors, as well as real estate organizations, invest in better mitigation, management and transparency, ultimately leading to improved risk-adjusted returns.”
According to the SEC, several surveys have found that one-third of publicly traded companies already disclose some information about climate-related risks, and one-fifth provide some information about Scope 1 and 2 greenhouse gas emissions. “This is about measuring your carbon emissions, understanding your physical climate risks, and what you can do to mitigate those risks,” says Shantz. “There's a real opportunity for members of the real estate industry to take advantage of the SEC's new rules and get ahead with proactive planning and strategy. There's a lot of good that will come out of this.”
Shantz points out that in the U.S., the real estate industry has been familiar with benchmarking ordinances for over a decade in more than 30 cities across the country, including New York and Seattle. “Many real estate companies already have sustainability programs and practices in place and are measuring their Scope 1 and Scope 2 emissions,” she says.
A proposed rule issued by the SEC two years ago would have originally required companies to disclose Scope 3 emissions, or indirect emissions produced by a company's suppliers and customers. After pushback from politicians, fossil fuel companies and other companies with large Scope 3 emissions, the SEC decided to limit the requirement to only Scope 1 and 2 emissions that are “significant” to a company's revenue.
The SEC rule does not supersede state regulations, such as California's, which mandate reporting of Scope 3 carbon emissions. Additionally, companies that operate globally have different disclosure standards to consider. “The International Sustainability Standards Board envisions having consistent, globally aligned climate standards,” says Schantz. “We're starting to move in the right direction, but we're not there yet. The European Corporate Sustainability Reporting Directive has requirements for Scope 3 emissions. This inconsistency means companies have to comply with different bodies in different ways, which adds complexity. Real estate is a global business, and compliance becomes even more difficult when companies have assets in different regions and countries. While the intent is aligned, the implementation of these policies is not yet in place.”
Schanz noted that companies that haven’t yet started reporting on climate-related risks can take advantage of the many resources ULI offers, including the ULI Blueprint for Green Real Estate and ESG Mapping. “We also have an annual update of all the global green building policies that impact the markets in which ULI members operate, called the ‘ULI Global Green Building Policy Dashboard,’” she says. “Any company can look up in their local jurisdiction and see what their buildings, whether new or existing, need to comply with in terms of resilience, energy efficiency and carbon emissions.” The ULI Resilience Summit, taking place in New York City on April 12, will also feature a session called “Climate Risk Disclosure: How to Assess and Report on the Physical Climate Risk of Your Assets.”
Additionally, the latest report in ULI and Heitman’s Climate Risk Series, “Change is Coming: Climate Risk Disclosure and the Future of Real Estate Investment Decision-Making,” discusses the changing regulatory environment related to climate disclosure and the potential impacts for real estate managers and investors.
“These disclosures are primarily focused on transparency around a company's or fund's sustainability goals, energy use, carbon emissions and physically-related climate risks. We're finding that real estate investors are looking to use these climate disclosures to their economic advantage. These disclosures influence where capital is allocated and allow investors to compare companies, funds and buildings,” Laura Kraft, global head of portfolio sustainability strategies at Heitman, said in a January video.
While the regulations are less stringent than those proposed two years ago, 10 US states plan to take the SEC to court. But Shantz believes investors' appetite for climate-related risks is likely to continue. “This is a key issue for public companies that comply with SEC rules,” she says. “Investors want to know this information. Whether these disclosures become mandatory this year or after a year of litigation, companies would be wise to get prepared now if they're not already. I can't imagine a future where there will be no regulation on this.”
Even complying with potential Scope 3 requirements is becoming less difficult, Schantz points out. “Carbon accounting is becoming part of how we operate. Scope 3 is already part of some government climate policies and voluntary net-zero and sustainability efforts, such as the Science Based Targets initiative and the World Green Building Council. The business and market for measuring Scope 3 is very robust and mature. We are prepared for it.”
“The SEC's climate disclosure requirements are an important step in standardizing how the real estate industry provides climate-related risk and greenhouse gas emissions data to investors,” said Ben Myers, senior vice president at Boston Properties Inc. “Sustainability leaders will benefit from the transparency and comparability of performance that comes with more integrated reporting and management.”