Real estate companies face a complex task in learning how to comply with the U.S. Securities and Exchange Commission’s (SEC) much-anticipated new rule on climate disclosure, which will require them to report their greenhouse gas emissions as well as their financial risks from climate change, panelists said at ULI’s Fall Meeting in Dallas.

In terms of the effort required to comply with the new climate rule, “people are projecting this to be even larger than Sarbanes-Oxley,” said Allison Bradshaw, a senior manager in audit and assurance for Deloitte, citing the 2002 federal law that imposed a greater degree of financial reporting on companies to prevent fraud. “Anybody who was around through that transition recognized that it was no small task, and it was costly for clients and companies to comply.”

The SEC rule has not yet been finalized—officials are scrutinizing thousands of comments filed by investors and industry players—but it is expected that the final rule will be issued either late this year or early next year, said Valerie Wieman, a partner at accounting and professional services firm PricewaterhouseCoopers.

That would mean the biggest publicly owned real estate firms will need to gather data on their own emissions, known as Scope 1, as well as the Scope 2 emissions from the generation of energy they use, for disclosure in 2024. Scope 3 emissions, a category that includes indirect emissions such as those produced by tenants, would be reported in 2025, though the Wall Street Journal and other media outlets have reported that the SEC may pull back that requirement.

Compliance Challenges

Real estate companies face significant compliance challenges, starting with figuring out how to quantify their carbon emissions, panelists said. Even for companies that have started voluntarily gathering data, there is a lack of clarity.

“It’s kind of what we like to call the wild, wild west right now,” Bradshaw said.

“ULI and its members can play a more active role in shaping these standards for measuring greenhouse gas emissions, climate risk, and broader ESG topics,” said panel moderator Billy Grayson, executive vice president of centers and initiatives at ULI. “These regulations can be more efficient and effective when they are informed by the real estate industry.”

Boosting Confidence

But while learning how to comply with the law could be challenging, the wealth of data that will be gathered will help boost investors’ confidence in real estate companies, panelists said.

Both the climate disclosure rule and Sarbanes-Oxley “are focused on the integrity of the capital markets and the needs of investors,” Wieman said. “Sarbanes-Oxley gave more reliability to financial statements by looking at the underlying controls and other provisions. Obviously, when you look at the SEC climate proposal, it comes from investor demands—from investors who want the information. They’re making broad-based assumptions about companies, and they think that more accurate information should come from the companies themselves.”

Mary Ludgin, senior managing director and head of global investment for real estate investment management firm Heitman, portrayed the SEC climate disclosure rule as in sync with a gradual shift in the nationwide real estate market, in which tenants increasingly will be interested in the climate impact of buildings. There is already movement in that direction, though it’s uneven, she said.

“In some cities, the tenants still don’t appear to be the slightest bit interested in knowing about energy efficiency,” she said. But other markets are the reverse, with tenants showing a strong interest. “I have a feeling that it will start to change and become a regular feature of questions that people ask.”

Stranded Assets

Ludgin also noted that greater availability of information about climate impact of buildings may also lead to more stranded properties that lose value because of a shift in societal attitudes and preferences. But that, in turn, could lead to adaptive use of buildings, so that they become “unstranded.”

Europe, which has been ahead of the United States on climate-related financial disclosure requirements, may provide some clues about the SEC climate disclosure rule’s eventual impacts on the real estate industry, said Juliette Morgan, director of environmental, social, and governance issues for global architecture, design, planning, and consulting firm Gensler.

What Europe’s disclosure requirements have done “is make people have to engage with their real estate portfolio and the climate risk. They have to scenario plan and mentally get their heads around the idea that there will be stranded assets,” she said.

“It’s also triggered the need for a different skill set within businesses. So where there wasn’t a need before for people to use geospatial modeling for climate change, nowadays it’s either within a business or consulting. I think it’s actually led to a culture of people thinking about and reporting on climate scenarios and culturally being slightly more embedded than what I’ve seen here.”

Morgan urged people in the industry to focus on “collective forgiveness” for past inattention to climate concerns and avoid suspicions that others are “greenwashing”—trying to create a deceiving appearance of being environmentally friendly.

“We’re all on this collective journey,” Morgan said.