CRE Braces for the Climate Disclosures Regs Coming from the SEC

When SEC chair Gary Gensler testified before the Senate Committee on Banking, Housing, and Urban Affairs recently, he was clear, if not detailed, that disclosures about climate risk, as well as human capital and cybersecurity, were on the short list.

“I’ve asked staff to develop proposals for the Commission’s consideration on these potential disclosures,” he said. “These proposals will be informed by economic analysis and will be put out to public comment, so that we can have robust public discussion as to what information matters most to investors in these areas.”

The concern isn’t new. In late July, during a webinar, Gensler said, “Today, investors increasingly want to understand the climate risks of the companies whose stock they own or might buy. Large and small investors, representing literally tens of trillions of dollars, are looking for this information to determine whether to invest, sell, or make a voting decision one way or another. Investors are looking for consistent, comparable, and decision-useful disclosures so they can put their money in companies that fit their needs.”

Few companies provide quantitative metrics on climate risks for investors to consider. That includes real estate companies in two ways: CRE investment firms have obligations to their investors, and it would be next to impossible for any company to report on climate risk without having information about their real estate, whether owned or leased.

“SEC Chair Gary Gensler has made ESG disclosure, including disclosure related to climate risk, a key priority for his agency,” Sairah Burki, managing director for regulatory policy at the CRE Finance Council, tells GlobeSt.com. “A review of hundreds of comment letters received by the SEC in response to their request for input on climate disclosures found that the vast majority of investor organizations support mandatory climate disclosures. This support ranged from a desire for specific metrics to principles-based requirements. A significant number of investors also prefer industry-specific disclosure.”

“The reality is it’s a good thing because we were seeing a lot of greenwashing that was going on and people saying industries that they were doing things when it was a lot of smoke and mirrors,” Peter Merrigan, CEO of Taurus Investment Holdings, tells GlobeSt.com. “The more transparency and real solutions we see, the better off we are.”

“When it comes to ESG performance and disclosure, the approach you take to satisfying your investors and customers—and increasingly, the SEC—will differ depending on whether you are public or private company or a fund,” Sonia Barros and Leonard Wood, respectively a partner and associate at law firm Sidley Austin, tell GlobeSt.com. “But certain steps to this end are fundamental and shared for all of those types of business.” That will include studying the efforts of peers, understanding the evolving landscape of voluntary disclosures, and studying your company’s own ESG rating reports.

Forthcoming SEC disclosure requirements or guidance are not widely expected to be so specific as to affect the exact manner in which companies and developers ‘green’ their properties, although it’s too early to rule that out,” Barros and Wood continue. “New SEC disclosure requirements and guidance are mainly expected to elicit more information from enterprises about their environmental programs and efforts, without pushing them toward particular methods.”

But as the requirements develop, there could be problems, especially as groups like CREFC try to develop reporting structures.

“Any attempt to create an alternate framework with incompatible criteria—or ultimately a failure to achieve a balanced and workable set of disclosure and reporting requirements—could be prohibitively costly, negatively impact an important source of liquidity for the CRE marketplace, and potentially drive borrowers and originators out of the publicly regulated markets and into private markets to which the SEC’s disclosure mandates may not apply,” Burki adds.