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SEC’s Green Disclosure Rule May Be Subtle Yet Significant Shift For CRE

When the Securities and Exchange Commission released a 500-plus-page proposal for green disclosure rules last week, it kicked off what is expected to be a significant shift in corporate reporting around environmental and climate risks.

But some of the most transformative aspects of the proposal, especially for commercial real estate, have been assigned few specifics — specifically the rules and regulations around reporting physical climate risks and indirect emissions, such as those created by materials suppliers.

The Securities and Exchange Commission headquarters in Washington, D.C.

Billy Grayson, executive director of the Urban Land Institute's Center for Sustainability and Economic Performance, said both physical risks and what are known as Scope 3 emissions are defined in “phenomenally vague” language in the proposal as aspects that need to be reported if they impact the “long-term financial health of a company.”

But their inclusion, despite being somewhat unclear, may lead to larger shifts in investment strategy going forward. 

“Climate risk is such an open-ended, quantitative risk,” Grayson said. “What’s the impact of a global carbon tax? How many of your buildings are within a 100-year flood plain? What’s the risk of insurance in the region?”

The SEC’s rulemaking and disclosure proposal come on the heels of a series of local measures attacking the carbon footprint of commercial buildings via strict regulations, such as Local Law 97 and Boston’s Building Emissions Reduction and Demand Ordinance.

Like those laws, the SEC's proposed rule would phase in over time, starting in 2024, first impacting companies with $700M or more in assets, before slowly encompassing more and more firms and demanding greater detail in reporting year by year.

But unlike these local laws, the SEC's spans industries, and even though regulators took pains to say the move was about disclosure, not mandating policy, many expect it will drive business owners to change behavior.

“If you’re Ernst & Young or a management consulting firm, you don’t want to move into buildings with significant environmental footprints,” said Verdantix President David Metcalfe, whose firm focuses on ESG reporting and consulting. “What you’ll see is a lot of financial firms and professional services, those without any real industrial emissions footprint, have less and less desire to move into buildings with high emissions intensity.” 

While the SEC rules won’t mandate action, “sunshine is the best disinfectant,” said Jason Hartke, executive vice president for external affairs for the International Well Building Institute.

“By nature, folks don’t want to report that they aren’t doing anything,” he said. “If we all had to put our SAT scores on Facebook, we’d all study harder to make sure we’re doing well.” 

Compared to many other industries with more significant fears of new costs around emissions tracking and auditing, commercial real estate has already been focused on measuring its own environmental performance, the analysts interviewed for this story said. The SEC proposal is likely to create more of an acceleration of reporting work and hires than a radical shift, they said; many large brokerages, such as JLL and CBRE, already report data to CDP, an international firm that monitors the environmental performance for more than 14,000 firms with $130T in assets.

Between the adoption of different standards, such as GRESB, to measure sustainability, CRE is “in good shape," Hartke said.

“There’s a strong business case to save energy, reduce emissions, and save money,” he said. “The industry has taken steps, and it’s understood that building performance writ large is important. Companies are able to show that greener properties demand higher rents and lease up more quickly.”

There is a significant, though not radical, difference between reporting voluntarily versus filing for the SEC in a company’s annual 10-K report on financial performance, a pivot from investor-focused info to government-mandated filing.

But while exact standards and accuracy may shift for a firm already doing some level of emissions reporting, by and large similar measurements, and existing programs such a Measurabl, provide the needed framework to file. What the SEC needs to figure out is a definition of the difference between tenant and landlord energy usage, and provide a framework and standard for this disclosure so companies can adjust their reporting accordingly, per a Real Estate Roundtable brief.   

Most large, listed commercial real estate firms and REITs already report these metrics, Green Street Lead Analyst Daniel Ismail said. The creation of a standardized method of reporting across all companies will aid in comparability during asset evaluation and deal-making, he said but most industry players have already begun factoring emissions tracking into their long-term strategy

“Our analysis shows that a third of the square footage of commercial real estate in top markets in the U.S. already has some type of disclosure rule of emissions target,” Ismail said. “It’s not necessarily going to change real estate strategies, because it’s been demanded by investors and regulators and state and local levels already.” 

Ismail added that the SEC rule could push more companies to delay going public to avoid the increased cost of meeting regulatory requirements.

SEC Chairman Gary Gensler

The industry's main challenge will be Scope 3 emissions. Since they encompass how tenants use energy, as well as downstream energy usage, it will be particularly important to REITs, and represent a significant amount of their impact. Measuring these emissions can be a challenge — some leases don’t require tenants to disclose this information to owners, so without assistance from utilities, gathering the data can be hard.

“This will incentivize REITs to start thinking about assets that will require less energy usage as part of their portfolio,” CDP Head of Corporations and Supply Chain Simon Fischweicher said. “It’ll push them to collaborate with tenants to utilize the benefits of energy-efficiency and create more access to on-site renewable energy.” 

Hartke isn’t convinced these disclosures would radically shift how existing buildings are evaluated. A lot of this kind of data is available at the transactional level for those who look for it, he said, via things like EnergyStar and LEED scores. What may end up being more impactful is that this array of data makes it that much easier for local and state governments to write regulations for emissions.

“This will accelerate state and local regulations regarding emissions reductions, which will have a longer-term impact,” Ismail said. “We’re not looking at nationwide carbon taxes anytime, but there’s risk in city and state regulations.” 

Acceleration may be the key term, especially as it relates to investment vehicles and even consumer investment products. Increased data can lead to more consumer-focused investment products aligning with more stringent ESG goals, which Fischweicher said would be a “big step forward in creating better, green consumers.” 

“Data transparency can drive better decisions and carbon reductions, but only if investors and tenants use that data to make more informed decisions,” Grayson said. “You need them to make decisions that help drive reductions. This could be a much more cost-effective way to drive emissions reductions compared to taxes and fines, and use it to make better decisions on what to buy and rent and price them efficiently. If they don’t, it’ll require a certain degree of regulation to push them to cut their emissions.” 

Hartke does see this as the beginning of a larger shift in the SEC’s attitude toward so-called ESG reporting, and its being more bullish and active when it comes to human and social capital factors. 

“These same types of rules are coming as it relates to workforce and board diversity and social capital,” he said. “This is the first phase of the SEC creating more consistency across the ESG spectrum.”