CRE Heavily Focused on Climate and Property Resilience

Regulatory considerations and investor demand for transparency are increasingly important drivers behind Environmental, Social and Governance (ESG) disclosure and reporting frameworks, according to a report issued this week by The CRE Finance Council (CREFC) based on responses from its members.

The Securities and Exchange Commission continues efforts to mandate, for public companies, ESG disclosure frameworks as it aims to prevent potentially misleading ESG investment activity.

More than half (55%) report that they do not use the ESG disclosure frameworks promoted by policymakers, primarily the Task Force on Climate-Related Financial Disclosures (TCFD) among the 55 percent of respondents that have a framework in place.

Climate-Related Disclosure on the Rise

The lack of standardization for compliance and disclosure requirements across different sectors, subsectors, and industries creates challenges, Sairah Burki, managing director, regulatory affairs & sustainability, CREFC, said in prepared remarks.

David Amerikaner, a member of Duane Morris’ Real Estate Practice Group who focuses his practice on land use, project development, environmental law, eminent domain, and sustainability tells GlobeSt.com that he’s not surprised that CREFC’s 2022 ESG Survey showed that ESG issues are increasingly top of mind for CREFC members. 

“Climate-related disclosure is on the rise, even in the absence of clear guidance and some reluctance to adopt benchmark frameworks. Lenders are taking a deeper dive into the climate resilience of assets, both for reporting purposes and because as the impacts of climate change intensify, CRE assets will come under increased threat, especially in coastal areas. 

“And there is more scrutiny on the carbon emissions and other environmental impacts of CRE assets, which over time should lead to greater investments in building energy efficiency and other sustainability measures. These trends, along with building carbon reduction mandates imposed by local governments, will increase transparency for investors and allow investment dollars to flow to worthy, sustainable projects.”

Sara Neff, head of sustainability, Lendlease, tells GlobeSt.com, regarding her company’s ambitious net zero commitment, “More investors are employing ESG as a tool to measure the viability of an asset, yet the real estate industry is not advancing on ESG at the same pace,” said Sara Neff, Head of Sustainability at Lendlease. “This gulf will only widen as investors demand more extensive ESG measures. For example, Lendlease has made a commitment to achieve net zero carbon emissions by 2025 and absolute zero by 2040; those in the real estate industry who have not made a similar pledge may struggle to attract capital.”

Seeking Standardized ESG Investing Rules

Ed Rossier, Managing Director and Head of Climate Finance at Enhanced Capital, tells GlobeSt.com, “Given recent SEC enforcement actions around ESG investing, it’s understandable that regulatory compliance is crucial for CRE Finance Council members, and we support efforts to both standardize ESG investing rules and make ESG investing more transparent, metric-driven, and quantifiable.”

Evan Jahn, president, architecture studio Jahn, tells GlobeSt.com, “An increased emphasis on climate and resilience is influencing the design and construction in both overseas and domestic CRE markets.

“Our European clients were compelled by local regulations to take a more holistic approach to the ecology of their buildings, and that practice is becoming more common in North America as stakeholders ranging from elected officials to end users of space look for ways to combat climate change,” Jahn said. “We are seeing this across property sectors, including commercial office as more national and international occupiers show preference for all-electric buildings that help them achieve their ESG goals.

“As developer clients become more mindful of their carbon footprints – with some facing regulations that require lower emissions – building methods such as cross-laminated timber and timber-steel hybrid structures are increasingly attractive for their lower-carbon intensity.”

Transparency is Top of Mind

Joe DiTizio, associate director, ESG, Business Development at EBI Consulting, tells GlobeSt.com, “Transparency has always been top-of-mind when deciding where to invest funds. This is particularly true when the ESG risks threaten the sustainability of a property, and CREFC’s survey results support this by having 71% of respondents ranking property resiliency as their top concern. 

“The push for standardized ESG disclosures is the next step to consistently providing the CRE industry with the information they want to know about their portfolio.”

Tony Liou, president, Partner Energy, tells GlobeSt.com that global warming and climate change have been in the public consciousness for decades now, “but the solutions for how to mitigate the risks from climate change as well as the need to achieve net zero carbon have only gained momentum in recent years. 

“Due to all the possible short- and long-term risks from climate change, there is increased focus on the importance of climate resilience, or the ability for a property to adapt to and withstand physical risks by retaining the same basic structure, function, and self-regulation. 

“Adopting the right resilience measures ahead of time is crucial to protecting assets from vulnerabilities in the future that could have much higher costs. 

“But before adopting any measures, it is important to first assess all the potential risks to the property, and the key is using a tiered approach. This includes screening for regional climate risks as well as assessing site-specific characteristics that will pinpoint potential risks at the asset level.”

Currently, there lacks a standard in how climate change risks are rated in terms of severity and how potential damages and losses are calculated, Liou said, and ASTM International is working on developing a scale to measure and standardize climate hazards as part of their Standard Guide for Property Resilience Assessments.

“However, asset owners and managers can use available climate and property data now to address site-specific climate-related risks,” Liou said. 

“Best practice is to begin assessing risks now, as more investors and government policies require businesses to address potential physical and financial risks. The first step asset owners and managers can take is to obtain a climate risk and property resilience assessment in order to ensure that mitigation measures are implemented before any damages are done.”

Trying to Reach Net Zero

Tim Streather, MD, Spica Technologies, tells GlobeSt.com, “As every industry tries to do its part to reach net-zero carbon emissions targets by 2050, it’s not surprising that the ‘e’ of ESG has become a priority for the property sector as well. After all, buildings account for 40% of all global carbon emissions. However, there are plenty of other factors at play.”

He said another factor at play is how important ESG has become for the investment community. “Resilience, ESG transparency and even carbon emissions reductions, have become key barometers in providing a level of assurance for investors,” Streather said. 

“That is putting significant pressure on owners and operators to step up if they want to keep the investment community onside.”