The Securities and Exchange Commission’s proposed new rule on climate disclosure, which would require registered companies to report both their greenhouse gas emissions and financial risks posed by climate change to their businesses, could have a major impact upon the real estate sector, according to experts.
The rule, which would affect publicly traded companies, as well as real estate investment trusts (REITs) that are registered with the SEC, was approved by a three-to-one vote in late March and now is in the public comment period that ends May 20. It’s part of a global trend in which governments are requiring increasing transparency from businesses about the extent to which their activities contribute to the global warming trend, and what impacts climate change may have upon the economy.
“A company would have to report its greenhouse gas emissions,” explains Duane J. Desiderio, senior vice president and counsel for the Real Estate Roundtable, who notes that the rule would affect companies across a range of industries.
Experts say that complying with some the requirements could be tricky for real estate. Among other complexities, the new regulation may require building owners to provide information about emissions generated by tenants’ energy use, which they often don’t control or measure, and estimate climate impacts that are uncertain, given scientists’ range of predictions. But some also think more climate-related disclosure ultimately could benefit the industry, by providing an incentive to cut emissions and plan for future risks, and by raising investors’ confidence.
“Transparency is really good for our industry, and consistent measurement of greenhouse gas emissions is also really important,” says Billy Grayson, executive vice president for Centers and Initiatives at ULI, and executive director of the ULI Randall Lewis Center for Sustainability in Real Estate. “In many ways, this is a valuable thing, to standardize how we track and report on greenhouse gas emissions.”
What’s in the New Rule
An SEC summary of the new rule says it would require three levels of disclosure about greenhouse gas emissions. Scope 1 would include a business’s direct greenhouse gas emissions, while Scope 2 would include “indirect” emissions from electricity or other forms of energy that the company purchases. Scope 1 and 2 disclosures would require third-party assurances of their accuracy, according to a fact sheet by the Real Estate Roundtable. While companies would get some leeway at first, within two years they would be expected to achieve “reasonable” assurance, comparable to a financial statement included in an SEC 10-k filing.
Companies also will be required to disclose Scope 3 emissions, a less-clearly defined category that Grayson says would include “induced” emissions that are created because of a business’ existence, even though it doesn’t control those emissions operationally or financially. For example, a building owner eventually may be expected to report the energy usage of a leasing tenant in an industrial building or residents of a multifamily apartment tower, even though the landlord doesn’t pay the bills or control how much energy they use.
Companies also will be required to disclose potential financial risks from climate change.
“Physical risks would need to be reported,” Desiderio says. “That gets to things like our buildings located in floodplains, or coastal areas, or locations that might be subject to water stress or drought.”
They’ll also have to estimate transition risk—that is, the potential costs that a company faces as the U.S. evolves toward a low-carbon economy. That could include the cost of complying with state and local environmental regulations and emissions-reduction targets, as well as meeting its own greenhouse gas-cutting goals.
“The commission also wants to hear about what they call climate-related opportunities,” Desiderio says. “What are the positive things that companies are doing to manage and minimize their carbon footprint and to minimize their GHG emissions? Are they buying renewable energy certificates? Are they entering into clean power purchase agreements? Is a company making investments to bring more renewable energy online, or to improve their buildings’ efficiency? Are they purchasing carbon offsets to offset their carbon emissions?”
Compliance Could Get Complicated
According to the Real Estate Roundtable’s fact sheet, compliance to the new rule would start for the biggest companies in 2024, with those who have a global value of $700 million or more needing to make their initial Scope 1 and 2 disclosures for greenhouse gases emitted during fiscal 2023. They wouldn’t have to make Scope 3 disclosures until 2025.
Companies in the $75 million to $750 million range would begin Scope 1 and 2 disclosures in 2025, with Scope 3 due in 2026. Outfits with a value of up to $75 million wouldn’t have to make Scope 1 and 2 disclosures until 2026, and would be exempt from Scope 3 reporting altogether.
Unlike Scope 1 and 2, Scope 3 emissions disclosures don’t require third-party assurance, according to the Real Estate Roundtable’s fact sheet.
Even so, experts think that Scope 3 emissions reporting may be complicated, because the category is not well defined and some information—such as tenants’ energy usage—may be difficult for owners to gather.
“It may be that investors think that energy consumption is material to you,” Grayson says. “And then you have to start figuring a way to track it and report on it, which may be a challenge because in many cases, owners don’t have access to the utility bills.”
Predicting the future climate risks and costs for real estate is another big challenge. It’s still unclear, for example, how owners should evaluate flood risks—whether they should focus on whether a building is located in the current 100-year-flood zone, or project future flood risks out to 2050 (as many new climate models are currently doing), for example.
“There will be a need for more guidance, and also more consistency in the industry, on how you measure the current and future physical risks associated with your properties,” Grayson says.
A Global Trend
The SEC’s proposed rule “is one of many global examples of the growing regulatory response to climate change,” says Grayson. Europe’s Sustainable Finance Disclosure Regulation (SFDR) requires public companies to provide detailed information on how they plan to deal with any possible negative impact that their investments may have on the environment. Climate disclosures are required by Japan’s Financial Services Agency (FSA). In addition, many cities across the world, including more than 20 in the U.S., already require disclosure of energy and greenhouse gas emissions performance of buildings, he says.
“The U.S. is behind most developed countries when it comes to regulatory requirements for emissions and climate risks. Our European clients are farther ahead due to having to comply with regulations such as SFDR, the EU Taxonomy and the Corporate Sustainability Reporting Directive. With these rules, the SEC proposes to join the EU and the UK in making ESG accounting and reporting a regulatory requirement.” said Daniele Horton, founder and CEO of Verdani Partners, a full-service real estate consulting firm with extensive experience in ESG. “Proactively aligning with globally recognized frameworks such as TCFD and Greenhouse Gas Protocol will help standardize reporting requirements to support critical actions needed to ensure a low carbon future.”
Grayson notes that the regulations only require companies to report their greenhouse gas emissions, not to reduce them. Grayson says that the U.S. Department of Energy’s eGRID database, which tracks the carbon footprint of almost all the electric power generated in the U.S., makes it easier to calculate a company’s direct emissions. But having to make the disclosure may motivate companies to consider more aggressive strategies for decarbonization, including more energy efficiency-driven retrofits, and new purchasing contracts for renewable energy, he says.
Ideally, “a combination of investors, regulators and customers will encourage you to cost-effectively reduce your greenhouse gas emissions,” Grayson says. “But this SEC rule is not going to force you to do that, or to hit any targets.”
The disclosure rule may also put pressure upon the industry to take a longer view of how climate will affect an asset.
“If you’re a developer, or an owner, like a REIT, you need to think about not only your investment horizon, but also the investment horizon of the person you’re planning to sell it to,” Grayson says. “You need to start thinking about that 20-30-year time frame, even if you only have a three-to-five-year hold as your goal.”
The rule may also create more clarity for investors concerned about climate issues. “It brings into the discussion the need for consistency,” says Jessica Long, head of sustainability for the U.S. real estate portfolio of Nuveen, a global investment manager. “Because if I’m reporting my emissions in one way, and somebody else is looking at it a different way, and then you put our two funds side by side, then one is going to look much more carbon intensive than the other, because we didn’t treat the emissions the same way.”
Companies that are active in international markets may have an easier time adjusting to the new SEC rule, because they’ve already had experience complying with regulations in Europe or elsewhere, Grayson says. Similarly, companies doing business in cities with carbon emissions disclosure requirements also have a head start on Scope 1 and 2 compliance.
“A number of our leading companies are gathering this information on scope one and scope two emissions already anyway,” Desiderio says.
One such firm is real estate development firm Boston Properties, which already is going to considerable lengths to quantify and reduce its carbon footprint, according to Ben Myers, the REIT’s vice president of sustainability.
“We have a requirement now on all major new development to collect and assess embodied carbon data,” Myers explains. “It’s an engagement of the supply chain, and a requirement that has to be coordinated with project management and written into specifications.”
Myers thinks that the SEC’s new rule ultimately will be beneficial, by focusing attention on the financial impacts of climate change.
“Real estate businesses will be better prepared to face climate-related transition and physical risks,” Myers predicts. “And in so doing, they will protect asset value over the long term as we transition to a low-carbon economy and the impacts of the climate crisis become more severe.”
PATRICK J. KIGER is a Washington, D.C.–based journalist and author.