SEC climate disclosure may require heavy lift for CRE firms
Many in the commercial real estate industry have already adopted voluntary ESG reporting. While the final language is far from being finalized, it is clear that early adopters are already incorporating ESG ideas into their reporting (which includes nearly all US publicly traded REITs) around the imperative climate. The new rules from the SEC may have a leg up in meeting them. -Related disclosures, once they are finalized, potentially by 2024.
The SEC released its proposed “Promotion and Standardization of Climate-Related Disclosure for Investors” rule for public comment on March 21st. If finalized, it would become the first rule requiring all companies registered with the SEC to report, measure and quantify climate change-related physical risks in their registration statements and periodic filings. In particular, the rules address the reporting on Scope 1, Scope 2 and Scope 3 emissions, as well as material risks related to climate-related events and infection risk related to compliance with federal, state and local climate laws.
The rule will have a dramatic impact on the commercial real estate industry, and it is receiving mixed reactions from industry participants. On the one hand, investors would welcome more consistent reporting of climate risk information. On the other hand, commercial real estate companies affected by the rule are concerned about additional costs and pressure on resources in reporting additional.
“I’d be very surprised if we didn’t get some moderate pushback from some commercial real estate folks because it’s a very wide-ranging rule,” says Josh Richards, ESG’s corporate director at Transwestern. “It’s going to be valuable to the industry, but I believe there’s going to be a lot of investment going with it,” he says. He said that people are going to pay close attention to that price tag and understand in the short and long term what the impact is really going to be.
ESG requirements have already become a major focus for institutional fund managers and companies raising money from institutions such as insurance companies, pension funds and sovereign wealth funds. “The demand for data from an investor’s perspective has been around for years, and it has really hit a significant time in commercial real estate. This rule just expands the market for companies that need to address these issues,” says Tony Liu, president of Partner Energy, a division of Los Angeles-based consulting firm Partner Engineering & Science Inc.
The main purpose of the SEC rule is to provide investors with transparency and consistency about information related to emissions and climate risks. Current reporting is voluntary and the lack of standards means it varies from company to company. Some firms publish the information in annual reports or separate ESG or Sustainability reports. “I read a lot of these reports. There is no standardization of reporting, and everyone tries to show themselves in the best possible light,” Liu says. “Therefore, any standardization provides better transparency and better transparency for decision making. Will allow an understanding of performance, and that’s important from an investor’s point of view.”
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Real estate investors are disappointed by the lack of standards around ESGs. Current reporting is a bit of an “alphabet soup,” notes Uma Pattarkin, senior investment strategy analyst and global ESG lead at Center Square Investment Management. There are several different voluntary reporting disclosure and guidance frameworks, such as the Global Reporting Initiative (GRI), the Global Real Estate Sustainability Benchmark (GRESB) and the Task Force on Climate-Related Financial Disclosure (TCFD), among others. “What this means for investors is that you effectively have a slight information overload, while at the same time not being able to consistently get the information you need across your entire investment universe,” she says.
More companies are voluntarily reporting on ESG metrics, including data on energy consumption and Scope 1, Scope 2 and, on a more limited basis, even Scope 3 emissions. However, companies are at very different stages in measuring and reporting. Some companies are ahead of the curve, while others are further behind in their ability to put together data to meet proposed disclosure requirements. There are some companies that don’t measure emissions yet, and it will take time for them to build the infrastructure at the asset level to measure emissions and then compile the information for the portfolio, notes Paterkine. “For those who are leaders in space, this will be a continuation of what they are doing, while it will really impact the backward and hopefully lead them along this decarbonization journey that we all need to move forward. Is required.”
Having an SEC rule that aims to create standardized reporting and allows investors to compare more information across companies on an “apples-to-apples” basis would be of great help to investors, Paterkine says. That being said, the currently proposed rule focuses on things that are important to some companies. “So, you’re still going to do an apples and oranges comparison because you think about what kinds of disclosures there might be from different regions and different markets,” she says. For example, a green building certification would not be relevant for a cell tower company, while it would be very important for an office company. “We are definitely moving in the right direction as it relates to creating some sort of standard or minimum framework,” she says. At the same time, companies are still trying to understand some of the qualitative aspects and gray areas within the rule, especially as it pertains to physicality, she adds.
Understanding reporting requirements
As outlined in the Real Estate Roundtable’s fact sheet, the SEC rule would require more rigorous reporting of Scope 1, Scope 2 and, potentially, Scope 3 emissions. Scope 1 looks at everything within the company’s power to control, which is largely utility bills on an asset. Scope 2 factors in the costs associated with producing and distributing that energy. Does that energy come from a coal-fired plant, wind farm, or a combination of sources? “By quantifying those things in Scope 2, it really tells you more about where your energy is coming from and the total footprint of that energy consumption,” Richards says.
According to the current rule, Scope 3 emissions reporting will only be required for something that is “materially relevant” to a business. While it is not clear how that materiality would be interpreted for real estate owners, Scope 3 generally includes reporting on emissions for space that is not directly under their control, such as triple net leased space where tenants In charge of paying utilities. It may also be related to reporting on the carbon footprint of development projects, which would involve excavation in embodied carbon, or the carbon emissions associated with manufacturing and transporting an object such as steel, wood and concrete.
“Scope 3 is going to put a lot of focus on the products, services, goods that you use. It can all be a lot more difficult to quantify. So, it is definitely something that is going to be heavy for some industries. is going to happen,” Richards says.
Beyond emissions, the new rule would also require additional reporting about material “physical exposure” to buildings and other assets resulting from climate change. This reporting requirement may pose more of a challenge to some smaller companies, as not everyone has a risk specialist on staff, notes Richards. Companies will also be required to report on “infection risks” such as those that result from regulatory compliance costs associated with federal, state and local climate laws.
Broadly speaking, the rule would require disclosures about governance for climate-related risks and appropriate risk-management processes in place for companies to address those risks. That reporting could pertain to a property located in a flood zone, or perhaps a property location in a city like New York or Washington DC that would need to be invested in to comply with the new climate laws. “There needs to be a lot of qualitative detail about how a company is actually managing its sustainability and decarbonization journey,” Paterkine says.
laying the groundwork
The SEC has set a fairly aggressive timeline. Compliance will begin in 2024 (covering fiscal year 2023) for very large companies, SEC registrants that have a global value of $700 million or more, who will be required to report Scope 1 and 2 emissions, and then smaller companies. would require a step-in. Reporting on Scope 3 emissions will begin in 2025 (covering FY2024 emissions). “Particularly for some of the laggards in the industry, the expectation is that it will start to develop some of the infrastructure, processes, resources and teams they need to start managing them more robustly,” Paterkine says. .
The steps that need to be taken to prepare companies depend on their starting point. Companies that are already following the voluntary reporting framework, such as GRESB and TCFD, are already on track to meet the new reporting requirements. Real estate companies affected by the proposed reporting rule will need to understand a basic measure of emissions at the asset level, as well as have the infrastructure and tools to collect and collect data. Much more materiality and life cycle assessment would need to be done at the asset level.
Several real estate companies are already reporting on Scope 1 emissions. Where much of the industry will focus on Scope 2 emissions for the next year or so, Richards notes. It will take a long time for Scope 2 emissions to catch on, especially for large property owners, he says. Beyond that, another big focus for companies will be to understand what is and is not. This materiality will be an issue not only in understanding Scope 3 reporting, but also in understanding reporting requirements relating to “material exposure” to assets resulting from climate change.
Companies need to collect, understand and manage data, and they also need to be able to act on the data to drive change. “I think good trustees and good real estate managers are already doing this,” Liu says. However, there are also some unknowns that pertain to the industry and are causing some pushback. By bringing to light more data points on things like exposure to climate-related weather events, how will the industry value that information? Can information on material risks and transition risks negatively affect values and capital flows in some companies? “Whether these data points affect real estate adversely or positively, they are the types of things that introduce some uncertainty into how real estate is being evaluated and managed,” he says.