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Real Estate Forcefully Pushes Back On SEC's Proposed Emissions Reporting Rules

Major players in the commercial real estate industry are urging the Securities and Exchange Commission to pump the brakes on a key piece of its proposed emissions reporting rules, saying it's too difficult to compile the data.

Industry groups like Real Estate Roundtable, Nareit and the Commercial Real Estate Finance Council wrote comments to the SEC last month advocating against individual companies being required to report emissions generated by certain building materials or tenants, a key component of the agency’s proposed climate change disclosure rule.

These comments, echoed in part by executives at firms like JLL and Prologis, show the industry is concerned about its ability to comply with the SEC’s proposed reporting regulations, despite comments submitted by many institutional investors cheering on the transparency required under said rules.


“Nareit strongly believes Scope 3 [greenhouse gas] emissions disclosure by REITs should be voluntary,” the organization wrote in its comments filed June 17. “REITs should only be required under the SEC’s emerging rule to report climate change information and data arising from operations under their direct and immediate control, and … commercial real estate tenants and supply chain contractors should, in turn, be responsible for disclosures of data arising from their own business operations.”

While some believe that reporting those emissions should be entirely optional, many of them advocated for the strongest form of a “safe harbor” for Scope 3 emissions reporting possible, arguing that if the SEC is going to require companies to track and report those emissions, companies should not be held liable for their accuracy as long as they were disclosed in good faith.

JLL executives wrote that they support the SEC's goals with the proposed regulations, including the Scope 3 disclosures, but want more time before they are required to report those emissions and pushed against a process that could require premature estimates, then revisions.

"Taking a penalizing approach creates headwinds toward the overarching objective of driving progress on sustainability," JLL's chief accounting officer and chief sustainability officer said in written comments.

The concern over upstream and downstream emissions, classified as Scope 3 under an internationally recognized framework, runs counter to the expressed desires of major investors like Norges Bank, the world's largest sovereign wealth fund, which say greater visibility is needed.

"For many companies, Scope 3 emissions can represent the majority of their carbon footprint and would therefore be relevant for investors' analyses," Norges Bank said in comments filed to the SEC. "Understanding a company's emission profile, including that of its value chain, is one element that helps us assess its exposure to climate-related risks."

The tension highlights the growing pains the global commercial real estate industry is going through as climate-conscious investors seek clarity and standardization of climate-related risk, especially as European countries move ahead of the United States in adopting standards.

The SEC proposed its climate-change disclosure rule in March, seeking to bring U.S. rules more closely in line with burgeoning international standards like the Task Force for Climate-Related Financial Disclosures with support from Alphabet Inc., Walmart and BlackRock.

As written, the rule will require publicly traded companies to begin tracking what are called Scope 1 and Scope 2 emissions, from direct operations and indirect operations — like purchased electricity or other forms of energy — each year beginning in fiscal year 2023. They would then be required to report an estimate of those emissions at the start of 2024, with a revised, more accurate disclosure to come later in the year.

The following year, the companies would also be required to disclose their Scope 3 emissions if they have set a Scope 3 goal or if they are a "material" part of the company's emissions, which the SEC defines as 40% of emissions or more.

Additionally, companies would be required to disclose their portfolio's exposure to climate-related risks such as flooding or natural disasters, the strategies and tools they use to manage that risk, and basically any other internal plans or mechanisms a company uses to confront its emissions and exposure to climate risk.

SEC Chairman Gary Gensler

"Our core bargain from the 1930s is that investors get to decide which risks to take, as long as public companies provide full and fair disclosure and are truthful in those disclosures," SEC Chair Gary Gensler said in a March 21 statement. "Investors need reliable information about climate risks to make informed investment decisions."

Some industry players are more worried about the new rules than others. Billy Grayson, executive director of the Urban Land Institute's Center for Sustainability and Economic Performance, told Bisnow he grades the proposal a B or B- for its attempt to quantify emissions and climate risk, saying it's "really good" that the SEC is attempting to develop comprehensive data on greenhouse gas emissions.

"I think that the expectations are Scope 1 and 2 emissions are very reasonable and implementable by a wide range of emissions, including real estate,” Grayson said. “It should be something that everyone is able to do.”

But as his grade suggests, Grayson believes there's room for improvement. He also believes that Scope 3 emissions reporting will be imperfect if implemented, noting some apartment renters or tenants on triple-net leases do not report their electricity usage to their landlord, blocking that level of insight.

"The lighting of my parking lot in a multifamily building, that would be Scope 2 ... [but] the energy use of my tenants using their lights or washing machine in their apartment, that would be Scope 3," Grayson said. "It’s pretty hard to hold somebody responsible for the energy use that they do not control."

Grayson believes that once all companies are reporting their Scope 1 and 2 emissions, that will give real estate companies an easier time tabulating for Scope 3.

Some of the industry's largest players have concerns about the new rules that go beyond Scope 3 emissions. In separate submitted comments, both JLL and Prologis said they were broadly supportive of the SEC's efforts, noting they had sustainability pledges and goals of their own.

But they take issue with necessitating essentially two emissions disclosures: once with estimated emissions as early as 60 days after the fiscal year ends for the largest firms, and once with a later filing once the company’s full emissions data from the end of the previous fiscal year has been tabulated.

"We encourage the SEC to consider providing more flexibility with respect to the timing and deadlines for reporting on annual greenhouse gas emissions," Prologis said in its comments. "We are concerned that we will not have sufficient time to effectively complete our GHG inventory and the third-party assurance process within the proposed timeframe."

Grayson said the SEC should require just one disclosure once a company has its emissions confirmed to avoid duplicative efforts or confusion.

"You have to guess [your total emissions], Grayson said. “It would be easier to just have one financial filing.”

The rules are scheduled to be finalized sometime around the end of the year. But there may be other looming obstacles to implementation.

The U.S. Supreme Court

U.S. Supreme Court watchers speculate that a ruling in the West Virginia v. Environmental Protection Agency case, expected this week, may significantly roll back the federal government's ability to issue new regulations without explicit congressional consent.

That case revolves in part on the major questions doctrine, a precedent set by the Supreme Court where regulations around issues of major national significance must be set in clear statutory authority. If the court rules in the EPA case that the agency’s greenhouse gas emissions rules exceed its statutory authority, it could hamper Gensler and the SEC’s climate-minded commissioners' efforts, Andrew Vollmer, a deputy general counsel for the SEC during the George W. Bush administration, told Bisnow.

“If the Supreme Court shows that it’s pretty strongly supportive of the major questions doctrine — that is, they care about narrowing constructions of regulatory authority — it should give commissioners on the SEC some pause,” Vollmer said. “That’s not what Gensler and at least two of his cohorts are doing. They are hellbent to issue these rules and they are going to issue these rules.”

The timing of the proposed rule also leaves it open to shifting political winds. House Republicans called the Climate Disclosure Rule "the largest expansion of SEC authority without a clear legislative mandate from Congress" in a letter to Gensler on May 4.

Republicans have already called for hearings about the rule, and should they retake control of the House in this year's midterm elections, they may pressure the SEC to make changes or halt its implementation altogether.

UPDATE, JUNE 30, 3:15 P.M. ET: This story has been updated to include further context regarding JLL's position on the SEC policy proposal.