How the SEC's Climate Rule Impacts CRE

After a long meeting, the SEC in a divided vote passed its long-expected greenhouse gas disclosure rule. While it changed “quite significantly” from the original more extensive form, as Anna Pinedo, a partner with law firm Mayer Brown, tells GlobeSt.com, there is still significant implications for CRE.

Perhaps the biggest simplification in the new version is the lack of demand for Scope 3 emissions, or those attributable to supply chains. Scope 1 emissions (directly generated by a company) and Scope 2 (created by electricity, heat, cooling, and other services the company uses) remain in place. They have to be material in nature.

“Larger commercial real estate companies that are public to start, and the commercial REITs, as well as potentially the REITs that own interest in commercial real estate, whether in CMBS or another format,” are likely to be immediately responsible for additional reporting, disclosures, and financial statement requirements, says Pinedo. So-called large accelerated filers (companies with public float — shares in the hands of public investors — of more than $700 million) and accelerated filers (public float over $75 million and under $700 million, with annual revenue of more than $100 million) will also have to provide an assurance report from an independent provider.

It’s likely to be an expensive package with heightened enforcement risk because the data is difficult to accumulate and analyze. “Some of it requires estimation,” Pinedo says. “Some of it requires looking into the future and anticipate policy changes, and that’s always very difficult.” That leaves grounds for mistakes, that could then become the subject of enforcement actions.

Also, the SEC rules are not the only ones companies might have to face. “California’s recent legislation (SB-256, SB-261 and AB-1305) already impacts many public and private companies within the U.S., including those operating in California with over $1B in revenue, those operating in California with over $500M revenue, as well as those operating in California that sell or use voluntary carbon offsets to make green claims,” Bill Harter, principal ESG solutions advisor at Visual Lease, tells GlobeSt.com in an email.

“European climate disclosure laws and the ISSB Standards (IFRS S1 & S2), also apply not just to companies based in those jurisdictions, but those that are operating there, as well,” Harter continues. “If those that operate internationally are putting Scope 3 emissions on their disclosures, they need to be able to back up their claims with actual data. The biggest mistake that these organizations can make is to assume that they can pump the brakes on their environmental reporting efforts just because the SEC is pulling back on Scope 3.”

In addition, CRE companies that might be outside the legal requirement may find themselves having to satisfy larger tenants who do need to disclose greenhouse gas information and will want it from the landlord. That said, certain net leases that leave the payment of utilities to the tenants might insulate the property owner. It’s a good reason to have a lawyer qualified in this area of the law to review leases.