On March 21, the U.S. Securities and Exchange Commission (SEC) finally released its proposed rules to require publicly traded companies to disclose their climate-related risks to investors. The rules include not only reporting of material and financial risks, but will also require disclosures on greenhouse gas (GHG) emissions. While some companies are already disclosing this information as part of their ESG programs, this SEC rule would standardize the practice.
Among other things, the proposed rules would require reporting on:
- Climate-related risks and their material impacts on the business. For the CRE industry, this means identifying physical risks to the individual assets, such as potential flooding, fire hazards, etc., and how they impact the assets.
- Processes and plans to manage climate-related risks. Related to this is the oversight and governance of climate-related risks. After identifying potential risks to the properties, there must be a plan to address those risks, such as identifying property resilience measures and implementing them.
- GHG emissions and reduction goals. This means collecting data and benchmarking emissions to show changes year-over-year. For those with reduction goals, the rules require companies to indicate their plans and progress toward carbon reduction.
The proposed rules would impact everything from operations, underwriting, due diligence, acquisition, investment committee decisions, all the way to disposition. Property owners and managers, as well as developers, should evaluate climate-related risks to their assets and implement resilience measures sooner than later if they want to stay ahead and be able to meet the asks of investors and lenders if and when the rules go into effect.
While GHG emissions benchmarking and assessing climate-related risks aren't entirely new in CRE, the SEC rules still pose certain challenges for companies looking to meet them.
Challenges and Solutions to Meeting Disclosure Rules
Availability of utility data
To report on GHG emissions, property owners or asset managers would need to gather utility data on the property. The SEC's new rules require reporting on Scopes 1, 2 and 3, which consist of direct emissions and indirect emissions from purchased electricity or other forms of energy. However, for certain properties, utility data may not be readily available, such is the case for NNN lease properties, so the data will require additional time and energy to gather. One solution to this is adding smart meters to record energy consumption, which will help significantly with data collection moving forward.
Consistency of climate change data
While there are industry-accepted data and methodology for assessing some common climate hazards, such as flooding, there is no consistency in hazard screening for many others, and data companies report on them differently. This makes determining severity of climate-related risks difficult, since there is no standardization in how risks are rated and how to calculate potential damages/losses. Developing a scale to measure climate hazards is one of the items that the ASTM committee will address in the Standard Guide for Property Resilience Assessments. However, lack of consistency doesn't mean a complete lack of data. Many companies are using the climate data available now to address site-specific climate-related risks. Property Resilience Assessments take into account the climate risks and individual property conditions in order to evaluate potential issues and provide mitigation measures to address them.
Making improvements
Implementing resiliency measures and energy efficiency measures will pay off in the long run, but there may be significant costs upfront, especially with system replacements. However, owners can begin with low-hanging fruit and improve the property incrementally. Retro-commissioning is a low-cost way to improve the operational performance of existing building systems and extend the useful life of equipment. However, this cannot fix all efficiency issues, and sometimes equipment needs to be replaced before its end-of-useful life. For equipment replacement or upgrades, estimating the install cost, energy and cost savings, and simple payback period will help determine priorities before implementation. Owners can use this information to address the items that will make the biggest impact within their budgets.
Changes in process and procedures
Currently, there is no uniformity in reporting on ESG or property resilience. As the ASTM works on a standard for property resilience assessment, companies are still facing the challenge as to what they could be doing in the immediate future. When it comes to ESG, there are multiple ESG frameworks that a company may adopt, but the key is to begin data collection now, since this will be the most challenging aspect of the process. Whether a company is reporting for ESG or to meet the SEC disclosure rules, gathering data on the properties will be a key step.
Taking the Next Step
While the SEC's proposed rules are new, there are established tools and processes readily available that allow companies to meet these challenges. Companies with ESG+R goals in place are already using these tools to mitigate risks. For those who are beginning to address the issues mentioned by the SEC, consider engaging an ESG+R consultant with commercial real estate focus as the place to start.
For a deeper dive into the impact of SEC disclosure rules on CRE and the tools and process available to address climate change risks and property resilience, watch this free webinar hosted by Partner Energy.
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Tony Liou
Tony Liou is the founder and President of Partner Energy, a division of Partner Engineering and Science that offers helps its clients improve their properties’ energy, water, and carbon efficiency, as well as property resilience and sustainability. Tony frequently shares his insights and discusses best practices at speaking engagements and through industry publications. He has presented at conferences including MBA CREF, NAREIM Meetings, CREFC Annual Conference, Environmental Banker Association (EBA) Annual Meeting, and IMN ESG Forums.
