Hurricane damage in Florida from Hurricane Idalia. USB has estimated the storm has created nearly $10 billion in damage. (Shutterstock)

Now more than ever, reporting on climate risk matters to real estate. There have been some global changes to the climate-related financial disclosure standards that ULI members should be aware of.

Over the past decade, the narrative surrounding the relationship between climate and business has evolved significantly. It is now well understood that climate change poses risks to the stability of the economy and the financial systems. As a result, investors—and other stakeholders—have been increasingly interested to understand not only companies’ impact on climate (for example through greenhouse gas (GHG) reporting) but also ways in which climate can impact companies’ finances.

The emergence of the Task Force on Climate-related Financial Disclosures (TCFD), established as part of the G20, in 2015 was a breakthrough moment in climate reporting. The TCFD developed a set of recommended disclosures for organisations to inform investors, and other stakeholders, of the climate-related financial risks they face. This was one of the key drivers behind the gradual integration of climate-related risks into mainstream financial risk management, now set to become a regulatory requirement in some jurisdictions, including the E.U., the United Kingdom, New Zealand, Singapore, Canada, Japan, and South Africa.

In 2021, the International Financial Reporting Standards (IFRS) Foundation—initially responsible for financial accounting standards—established the International Sustainability Standards Board (ISSB), with the goal of developing universal, global sustainability disclosure rules. These new rules were finally published in June 2023, and they came with the announcement that the ISSB will take over responsibility for monitoring companies’ climate-related disclosures from the TCFD. This move indicates further alignment between financial and ESG reporting, with a particular emphasis on climate risk. It also aims to simplify and consolidate the landscape, eliminating the need for duplicate reporting, which the built environment sector has been calling for. Helen Gurfel, head of sustainability and innovation at CBRE Investment Management, said: “The real estate industry will benefit from the consolidation of initiatives and a reduction in redundant reporting. The ISSB is well positioned to monitor and adjust the standards as climate and sustainability disclosures mature and evolve.” She added: “The IFRS Foundation and ISSB have demonstrated true leadership in their approach to setting the new standards. By integrating and building on the well-established recommendations of the TCFD, they are helping to drive consistency and consolidation in climate disclosures.”

The ISSB’s inaugural sustainability disclosure standards, IFRS S1 and IFRS S2, are effective from January 1, 2024, and are intended to become a global baseline, allowing investors with international portfolios to make decisions based on consistent and comparable information.

IFRS S1—otherwise known as General Requirements for Disclosure of Sustainability-related Financial Information—enables companies to communicate the broader sustainability-related risks and opportunities they face over the short, medium, and long term, resulting from, for instance, changes in the portfolio’s energy consumption and or integrating energy management considerations into their investment analysis and operational strategy.

IFRS S2, Climate-related Disclosures, focuses on climate change mitigation and adaptation and is designed to be used in conjunction with IFRS S1, covering such topics as proportion of assets exposed to climate-related hazards (e.g. flooding, water stress, or heat stress) and strategies to mitigate the risks associated with that exposure.

Both standards follow the structure of TCFD’s four pillar approach: governance, strategy, risk management, and metrics and targets. In addition, the requirements set out in IFRS S2 are consistent with the four core recommendations and eleven recommended disclosures published by the TCFD.

Darryl Stuckey, head of sustainability transformation—environment at Lendlease, said: “Lendlease applauds the effort to integrate reporting systems globally, and was proud to participate in the ISSB stakeholder engagement process. As an early adopter of TCFD we are well placed to further evolve our corporate disclosure and look forward to integrating the new ISSB standard into our reporting, in accordance with the Australian government’s timeline for mandatory climate disclosures.”

As IFRS S1 and S2 are so closely aligned to the TCFD framework, companies that apply the ISSB standards will not need to complete a separate TCFD report. However, there are some key differences between the ISSB standards and the TCFD guidance. First of all, the ISSB emphasizes the connection between sustainability-related financial disclosures and financial statements, asking companies to provide both at the same time and in the same place, as a part of the general financial reporting. Secondly, unlike TCFD which is sector-agnostic, IFRS S1 and S2 contain additional requirements on industry-specific disclosures, asking companies to consider sustainability-related topics and metrics that are most likely to be material to them, as identified by the Sustainability Accounting Standards Board (SASB). The industries covering the built environment sector, according to SASB, include home builders, real estate services, and real estate. For each of these industries, SASB developed a list of relevant disclosure topics and metrics: In the case of the real estate industry, for instance, this includes operational energy and water, tenant sustainability impacts, and climate change adaptation efforts. “The new standards will help organizations communicate and report on a complex topic in a structured and uniform way, while also providing decision-useful information to investors applicable to the sector”, commented Gurfel.

The IFRS S2 standard expands even further on the TCFD framework, stressing the need for quantitative information where possible, and emphasizing that disclosing climate-related opportunities is as important as disclosing climate-related risks. It also requires disclosure of Scope 1, Scope 2, and—most notably— Scope 3 emissions, including information on financed emissions for companies in asset management, commercial banking or insurance. Finally, IFRS S2 asks organizations for more detail on a company’s climate-related targets, including information on how they are aligned with the Paris Agreement, whether they have been validated by a third party, and whether companies are planning to use any carbon credits to achieve them.

It is important to note that the new ISSB standards are meant to serve as a global baseline, setting minimum reporting requirements. Some jurisdictions—and some investors—will expect to see more than what is dictated by the IFRS S1 and S2. A key example of this is the approach to materiality. As defined by the ISSB, material information that needs to be disclosed includes “all sustainability-related risks and opportunities that could reasonably be expected to affect the company’s prospects—its cash flows, access to finance or cost of capital over the short, medium or long term.” This differs from the European Sustainability Reporting Standards, for example, and their double materiality approach, which requires companies to report not only on how sustainability issues might create financial risks for the company (financial materiality) but also on the company’s impacts on people and the environment (impact materiality). Although having a global baseline is an important step towards increased consolidation and consistency of reporting, companies will still need to adapt their approaches depending on the market they operate in, and the expectations of their stakeholders.

It is now widely recognized that sustainability- and climate-related issues are material to companies’ finances, and investors increasingly integrate the information on sustainability risks and opportunities into their decision-making. The recently published ULI and Heitman report, Change is Coming: Climate-Risk Disclosures and the Future of Real Estate Investment Decision-Making, explores in more detail how climate disclosures are used in investment decisions. You can now register for a webinar that reviews the report’s findings, held on October 4th for U.S./Europe audiences and October 5th for U.S./Asia-Pacific audiences.

Early next year, ULI will also publish a primer on what the ISSB standards and changes to climate risk reporting mean to the real estate sector. For a comprehensive overview of the current ESG reporting landscape, see ULI’s Mapping ESG report, and for detailed information on valuing transition risks associated with the move towards a low-carbon economy, see ULI’s Transition Risk Assessment Guidelines.