There’s been growing talk of ESG regulation — particularly the environmental part — that would begin to have an impact on CRE, but it had seemed like a conversation that kept getting put off. Like the Securities and Exchange Commission interest in significant disclosure requirements: noise but action getting delayed.
The general quiet period is coming to an end, according to credit and risk management firm Moody’s Analytics. If they’re correct, the commercial real estate industry will feel the impact.
“While the US has been slower to integrate climate risk into financial supervision compared to the EU, the last two years saw many US agencies launching climate risk work streams, which are now beginning the process of actively integrating climate risk into the supervisory and regulatory activities,” the firm wrote. “Some of these developments relate directly to real estate assets, while many more have indirect implications through their impact on investors, lenders and publicly traded companies.”
As of November 2022, Moody’s mentioned six different specific developments. First, the Department of Housing and Urban Development launched a new climate requirement, under which new multifamily development and rehabs will have to expand their environmental assessments to include climate impacts, with an online site to what is required. In October, the comment period closed on a proposed rule for a green and resilient retrofit program.
The Environmental Protection Agency is looking for comments by January 18, 2023, on how it can support further use of electric vehicles (which would have to include parking and charging at properties) and standardization of corporate climate reporting.
Banking and financial regulators are getting involved. The Bank for International Settlements published a set of principles for supervision of climate risks and the Fed said that six banks will take part in a pilot climate scenario analysis next year. The Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation are working on principles of climate-related risk management, while the Commodity Futures Trading Commission seeks comments on a detailed climate risk questionnaire.
The Federal Housing Finance Agency now has eight working groups and included climate risk into how it evaluates Fannie Mae, Freddie Mac, and Common Securitization Solutions.
And insurance industry groups — International Association of Insurance Supervisors, Sustainable Insurance Forum, National Association of Investment Companies, and Federal Insurance Office — are looking at including climate risk in oversight and underwriting data.
Moody’s notes that most federal agencies are at a planning stage. The example of the SEC shows that such moves can get effectively derailed. But with increasing concern and palpable results of climate change, it’s hard to see that trend continuing.
And then there are local regulatory efforts with significant impact, like New York City’s Local Law 97, which requires energy efficiency and greenhouse gas emissions limits by 2024, with financial penalties for buildings over 25,000 square feet that fail to comply.
Stormy weather ahead.