U.S. SEC Forces Climate Risk Disclosure – What Does that Mean for Real Estate?
On March, the U.S. Securities and Exchange Commission, the largest and arguably most powerful regulator of the finance industry, proposed legislation to make the disclosure of carbon emissions and climate risk mandatory for publicly traded companies. While some countries around the world had introduced such mandatory disclosure already, this new piece of legislation will be a (transparency) shock to many firms.
In short, listed companies, including Real Estate Investment Trusts (REITs) will have to report Scope 1 and 2 carbon emissions, and if material, even Scope 3 emissions, i.e., those carbon emissions that are not under their control. In addition to carbon emissions, companies will have to disclose climate risks that may have an impact on their business, how those risks are managed, and what the reduction goals are. Importantly, the financial implications of climate risks also need to be reported.
For the more than 225 REITs that are listed on of an exchange in the U.S., this new regulation implies that data needs to be collected in all assets that are on the balance sheet, whether these assets are managed by the REIT or not, and notwithstanding the lease structure. While about 50 (mostly large) REITs are consistently reporting to GRESB (the Global Real Estate Sustainability Benchmark), which means data collection on energy consumption and carbon emissions is on their radar, many REITs have yet to begin their data collection and management efforts. Moreover, triple-net leased assets are often excluded from data collection efforts, as tenants in or operators of such buildings are responsible for energy procurement.
Of course, there will be ample debate on what is material and what is not. Timelines on implementation of the regulation will be stretched out. But ultimately, real estate investors will have to come clean on the energy consumption and carbon intensity of their portfolio, and hence the underlying assets. Private equity real estate investors may be shielded from the climate risk disclosure regulation for now, but likely not for long, as listed REIT investors will demand transparency in ESG KPIs when they acquire new assets.
Across the pond, European and UK investors are subject to voluntary disclosure mechanisms already, such as the best practice reporting recommendations from EPRA and INREV, and investor-mandated reporting to GRESB. In addition, in most countries, there are regulatory frameworks that require the disclosure of energy performance ratings at the asset level. Those are mostly “design” ratings only, but typically, what happens in the U.S. will come to the U.K. and subsequently mainland Europe – the good, the bad, and the ugly. In this case, views on mandatory climate risk disclosure probably vary from ugly to good, but real estate investors better get in line and start with measuring and managing the energy consumption and carbon emissions of their assets today!