Opportunities Remain to Advance Transparency in Real Estate
In a major step forward for transparency, the Securities and Exchange Commission proposed on March 21 that public companies be required to publish their greenhouse gas (GHG) emissions. The SEC also proposes to require that companies publish information about climate-related risks that are likely to have a material impact on their business. Building owners and other real estate actors should recognize that the SEC rule will accelerate a market dynamic that will grow exponentially and significantly increase demand for high performing buildings. Building owners should respond by getting ahead of the curve with their own investments.
Building owners should respond by getting ahead of the curve
Investors increasingly believe that climate change poses major risks to their assets and so are clamoring for relevant information. To give a sense of the enormous collective power of such investors, signatories to the UN-backed Principles for Responsible Investment (PRI) hold over $100 trillion in assets. The SEC’s proposal responds to such investors. SEC Chair Gary Gensler said, “if adopted, [the rule changes] would provide investors with consistent, comparable, and decision-useful information for making their investment decisions, and it would provide consistent and clear reporting obligations for issuers.” Gensler believes that the proposal would help companies more efficiently and effectively disclose climate risks and meet investor demand and that “companies and investors alike would benefit from the clear rules of the road proposed in the release.”
Many large companies already voluntarily report their GHG emissions, but they usually do not include them in the audited annual financial reports most scrutinized by investors and the SEC. Referencing the widely used Greenhouse Gas Protocol, the SEC proposes that companies include Scope 1 and 2 GHG emissions in their audited annual reports. Scope 1 emissions include direct emissions from companies operations like burning fossil fuels in their buildings. Scope 2 emissions include indirect emissions like emissions related to generation of electricity purchased by the company. The SEC also proposes that certain companies be required to report their Scope 3 emissions—including emissions attributable to their customers and suppliers. The SEC’s proposal would hold companies accountable for the accuracy of GHG reporting, especially with respect to Scope 1 and 2 emissions.
Following the lead of the Task Force on Climate-related Financial Disclosures (TCFD), SEC’s proposal requires companies to report significant (“material”) risks to their businesses related to climate change. The risks of climate change can be divided into two categories: physical and transition risks. Physical risks include direct risks posed by climate change, for example, risks from severe weather. In the context of climate change, transition risk is the risk inherent in changing strategies, policies, behaviors, or investments as society works to mitigate climate change, including by decarbonizing our economy. Legal requirements, like building performance standards (BPS), create quantifiable transition risks. In many cases, the SEC’s proposed rule will require companies to disclose the financial impact stemming from their ownership of buildings covered by current and potential BPS. These disclosures will lead investors to pay more for shares of companies that own high performing buildings that already comply with BPS. Building owners will respond by investing more to improve the performance of their buildings. This market dynamic will serve as a force multiplier, accelerating and increasing the market transformation impact of BPS, reducing GHG emissions, and helping BPS to achieve their intended outcomes.
This market dynamic will serve as a force multiplier, accelerating and increasing the market transformation impact of BPS, reducing GHG emissions, and helping BPS to achieve their intended outcomes.
Unfortunately, SEC’s proposed rule does not go as far in standardizing reporting by building owners as would most benefit owners, investors and the climate. In comments submitted in June 2021 in response to SEC’s request for input, IMT called for real-estate-industry-specific rules and guidance, but the SEC proposal largely does not address this. IMT still recommends that the SEC provide this additional standardization and clarity in future guidance to enable investors to make apples-to-apples building performance comparisons across companies and time periods. In particular, in their reporting to GRESB, CDP and other ESG platforms, some companies currently include in their Scope 3 emissions the energy consumption by the tenants in their buildings; other companies do not. In the interest of standardization and comparability, the SEC should require that companies strive to account for all tenant emissions and the SEC should provide more detailed guidance regarding classifying the Scope of tenant emissions. Utilities and utility regulators should streamline landlords’ access to aggregated tenant utility consumption data to facilitate building owner compliance with this requirement. (Many utilities already do this.) To standardize reporting, the SEC could require that all companies use the ENERGY STAR platform to calculate large buildings’ GHG emissions and that they employ ENERGY STAR methodologies and conversion factors (including factors from eGRID) in calculating emissions from all buildings.
While there are opportunities for further improvement, when finalized, the SEC’s proposal will be one of the biggest wins for climate action and transparency in recent years. The SEC, investors, owners, other commenters responding to the SEC, and developers of systems like TCFD and the GHG Protocol have done the world a great service in enabling this important step.
Owners, investors, tenants, and service providers would be wise to futureproof their balance sheets and grow their revenue by responding to this news by accelerating the development and execution of comprehensive short- and long-term capital plans to invest in improved building performance. IMT has resources that can help:
- Green leasing resources including Green Lease Leaders and performance-based leasing
- Added Value of ENERGY STAR-Labeled Commercial Buildings in the U.S. Market
- IMT-Appraisal Institute guidance for appraisers, owners and lenders regarding green building and property value
- Case studies of added value from energy efficiency renovations