Assessing the Impact of the SEC’s New Climate Disclosure Rules on the Real Estate Industry

Last week, the U.S. Securities and Exchange Commission (SEC) issued new rules requiring public companies to enhance and standardize climate-related disclosures. The rules phase in over time, requiring the largest companies or public investor shares to begin making climate risk disclosures in 2025.

“We have been waiting for this for a long time, to understand what the SEC would require of publicly listed companies,” says Marta Schantz, co-executive director of the ULI Randall Lewis Center for Sustainability in Real Estate. “From our perspective, climate risk is financial risk, so we see it as important to business success that the real estate industry thinks about climate risks, and that companies understand both the physical risks and the transition risks associated with their business.

“The SEC’s ruling is important, as it sends the right signal about one of the most material risks our industry is facing,” says Brenna Walraven, president and CEO of Corporate Sustainability Strategies Inc. “Having consistent, comparable, and decision-useful information about the risks and opportunities around climate change will help not only investors but also real estate organizations invest in better mitigation, management, and transparency, which will ultimately drive better risk-adjusted returns.”

According to the SEC, some studies indicate that a third of public companies already disclose information of some kind about climate-related risks, and one-fifth offer some information about their Scope 1 and 2 greenhouse gas emissions. “It’s about measuring carbon emissions and understanding their physical climate risks and what they can do to mitigate those risks,” says Schantz. “There’s a real opportunity here for members of the real estate industry to take advantage of the SEC’s new rules so they can come out on top with proactive plans and strategies. A lot of good could come from this.”

Schantz notes that in the United States, the real estate industry has become familiar with benchmarking ordinances for more than a decade in more than 30 cities across the country, including New York and Seattle. “Many real estate firms already have sustainability programs and practices and are measuring Scope 1 and Scope 2 emissions,” she says.

Draft rules that the SEC issued two years ago originally required companies to disclose Scope 3 emissions, indirect emissions produced by the company’s suppliers or customers. Pushback from politicians as well as fossil fuel companies and other businesses with high Scope 3 emissions led the SEC to limit the requirements to only include Scope 1 and 2 emissions that are “material” to a company’s bottom line.

The SEC’s rules do not override state regulations, such as the ones California passed that require reporting Scope 3 carbon emissions. In addition, businesses that operate globally have a range of disclosure standards to consider. “The International Sustainability Standards Board envisions having consistent and globally aligned climate standards,” Schantz says. “We’re starting to move in the right direction, but we’re not there yet. Europe’s Corporate Sustainability Reporting Directive has requirements for Scope 3 emissions. That inconsistency means that companies will have to comply in different ways to different bodies, adding a level of complexity. Real estate is a global business, and when companies have assets in different localities and different countries, it makes compliance that much harder. The intent is aligned, but the implementation of these policies isn’t yet.”

Companies that have not yet begun reporting climate-related risks can make use of numerous resources that ULI provides, Schantz notes, including the ULI Blueprint for Green Real Estate and Mapping ESG. “We have also started to keep an annual update of all the global green building policies that affect markets where our members have a business, called the ‘ULI Global Green Building Policy Dashboard’,” she says. “Any company can look at their local jurisdiction and see what their buildings have to comply with, whether new construction or existing buildings, in terms of resilience, energy efficiency, and carbon emissions.” The ULI Resilience Summit on April 12 in New York City will also include a session called “Climate Risk Disclosure: How to Assess and Report Assets’ Physical Climate Risk.”

In addition, the most recent report in ULI and Heitman’s climate risk series, Change is Coming: Climate-Risk Disclosures and the Future of Real Estate Investment Decision-Making, describes the changing regulatory landscape related to climate disclosures and the potential impact on real estate managers and investors.

Laura Craft, Heitman’s global head of portfolio sustainability strategies, said in a January video, “These disclosures largely focus on transparency related to company and fund’s sustainability targets, energy usage, carbon emissions and physical-related climate risks. We’re observing that real estate investors are looking to use these climate disclosures to their economic advantage. These disclosures can influence where capital is deployed and allow investors to compare companies, funds, and buildings.”

Although the regulations are less stringent than those proposed two years ago, 10 U.S. states are planning to challenge the SEC in court. However, Schantz feels that investors’ desire for climate-related risks will only continue. “It’s material to publicly traded companies that abide by SEC rules,” she says. “Their investors want to know this information. Whether or not these disclosures are required this year, or after a year of litigation, companies would be wise to get their ducks in a row now if they haven’t yet. I don’t see a future where there won’t be any regulation around this.”

Even complying with potential Scope 3 requirements is becoming less difficult, Schantz notes: “Carbon accounting is becoming a part of business operations. Scope 3 is already a part of some government climate policies and voluntary net-zero and sustainability commitments, including 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’re ready for it.”

“The SEC’s climate disclosure requirements are an important step towards standardizing how real estate furnishes climate-related risk and greenhouse gas emissions data to investors,” says Ben Myers, senior vice president for Boston Properties. “Sustainability leaders will benefit from performance transparency and comparability resulting from more integrated reporting and controls.”