New SEC Environmental Disclosure Rules Will Hit CRE Surprisingly Hard

After years of discussions and hints, the Securities and Exchange Commission finally released its proposed environmental disclosure rule for public company reporting. They include greenhouse gas emissions; how the company governs and manages climate-related risks; actual or likely material impacts on business, strategy, and outlook; financial statement metrics; and information about climate-related goals and any transition plans.

Getting the information and making the determinations will be a challenge for any sized company that comes under the SEC’s purview. But there are significant questions about who is responsible for gathering and reporting information from commercial real estate facilities.

“This is a prime example of market participants like ESG investors and large companies (appropriately) acting like the adults in the room,” Blaine Townsend, executive vice president as well as director of sustainable, responsible, and impact investing at wealth and investment management firm Bailard, said in a statement to GlobeSt.com.

“My initial reaction is that the SEC essentially gave ESG investors everything they requested on enhanced climate-change disclosures,” Michael Biles, a partner in King & Spalding’s securities enforcement and regulation practice, tells GlobeSt.com. He adds that companies will have to disclose “detailed information about how their business impacts climate-change” in their annual 10-Ks or registration statements. 

“The proposed rules will be eye-opening for most registrants, particularly those that do not operate in energy or heavy industrial space and thus probably did not think that they needed to monitor or report their GHG emissions,” Biles adds.

Verdantix, an ESG research and advisory firm, estimated that the changes will run $6.7 billion on consulting over the next three years and “pose an additional challenge” for companies that don’t have the “internal and external experts to implement a robust management system for SEC climate rule disclosures.” 

“[T]he real question is how far will the requirements go/?” Thomas Gorman, a partner in the law firm Dorsey & Whitney, said in a statement sent by the firm to GlobeSt.com. “The answer is in probability not as far as some foreign regulators such as the Hong Kong securities commission and the Monetary Authority of Singapore who are leaders in this area have gone. There will surely be a beginning, however, which in probability will be followed by lawsuits.”

What gets sticky is who will have to report what in CRE. Companies under SEC regulations will need data and analysis to even make the determination of whether there are material impacts on business, strategies, and outlooks, let report specifics.

“Under the proposed rules, all registrants must disclose their Scope 1 emissions—i.e., ‘direct GHG emissions from operations that are owned or controlled by a registrant’—and Scope 2 emissions—i.e., ‘emissions as indirect GHG emissions from the generation of purchased or acquired electricity, steam, heat, or cooling that is consumed by operations owned or controlled by a registrant,’” Biles says. 

But lines get blurred. “For example, if a software company that rents office space owned by an insurance company, who discloses the emissions caused by the electricity used in the office building, the software company or the insurance company?” says Biles. “I don’t know the answer to that question.”

What if commercial tenants want environmental information to do their reporting and that becomes a requirement for a landlord that, even if used to office or industrial leasing, doesn’t have the necessary data? Or what if landlords will feel increasing pressure to provide bundled services? What are the landlord’s obligations then? 

This could get complicated and sticky quickly.