Matthew Fitzgerald and Jade Bonney explore how the SEC climate reporting rules will impact sustainability in real estate and drive technology adoption.
Key points
- Regulation is catching up with voluntary reporting to make it compulsory
- The final SEC ruling is expected in Q1 2023 and is anticipated to make scope 3 reporting a requirement by 2024 for large firms
- The potential inclusion of scope 3 emissions, related to supply chain, constitutes 70% of companies’ emissions
- Few companies have the mechanisms in place to capture the data for the financial reporting that will soon be required
- The aggregation of building use data, and the analysis and measurement of that connected data set, is the only way to tackle this significant challenge in time
- The scale of the climate transition requires the creation of new revenue sources to mobilise the industry
In March 2022, the US Securities and Exchange Commission proposed new rules to enhance and standardise climate-related risk disclosure, requiring registrants to include certain climate-related disclosures in their financial statements.
The ruling compels almost 4,000 US public companies and – crucially – also foreign companies which trade securities in the US (ie, if they are cross-listed on any US stock exchange), and foreign private individuals who file 20-F forms, to report climate-related risks, emissions and net zero transition plans. The finalised standards are expected to be confirmed in early 2023.
Given many of these entities occupy and own substantial real estate portfolios, the implications for the property industry could be significant. The SEC ruling aims to build on years of voluntary reporting from firms – however, with this important step towards formal reporting, the pressure on the property industry is mounting. The proposal is built on the recommendations of the Task Force on Climate-Related Financial Disclosures, using the four pillars of the TCFD framework: governance; strategy; risk management; and metrics and targets, to impose a more systematic approach to managing and reporting the climate-related risks companies and individuals already think about.
What is required?
The proposal would require companies to disclose information about their scope 1, 2 and 3 greenhouse gas emissions. Scope 1 and 2 are emissions generated by a company’s own operations and through the energy it purchases. Scope 3 is all emissions throughout the entire value chain and can be classified as upstream emissions, those that are related to the purchased or acquired goods and services, or downstream emissions, which comprise those related to sold goods or services. Scope 3 emissions often are the largest source of emissions for companies, typically accounting for more than 70% of a business’s carbon footprint. In addition to this, organisations must report on material risk and strategic implications, as well as targets and transition plans.
The increasing legislation and the need to comply with reporting standards, such as the SEC, is forcing landlords, developers, asset managers and their tenants to evaluate their carbon emissions and gather the data needed to report on it. It is expected that large companies will be advised to disclose most of this information as of fiscal year 2023, while smaller companies are expected to report on fiscal year 2024. Reporting of scope 3 emissions is anticipated for the fiscal year 2024 for larger companies and 2025 for smaller ones.
However, Deloitte’s 2023 commercial real estate outlook study of the views of 450 CFOs shows that only 12% of companies have planned for, and are ready to meet, these major regulatory changes, which shows the scale of the challenge and opportunity for new revenue sources related to the climate transition.
Don’t delay
Given occupiers will be looking to obtain GHG emissions figures, risk disclosure and emissions reduction plans for any current or new building, real estate companies that have this information available early will have a competitive advantage. It is imperative that such organisations are prepared for the inevitable climate risk questions that will be raised by tenants, investors, lenders and other stakeholders.
For tenants and investors, the requirement to disclose real estate climate risks and emissions should drive improvements in data processes and help identify emissions reductions opportunities. As ever, the effective use of data will be key. Again, according to Deloitte’s study, only 7% of companies use ESG data and analytics in decision-making. Gathering data, analysing and then measuring the action taken is driving investment into new technologies, which help to improve understanding of how the assets are being used. Opportunities will arise for real estate players that understand how climate factors affect their portfolios and asset values and can respond in ways valued by tenants, lenders and investors. With this increasing focus, there has been increased demand for sustainable, environmental office spaces.
We are only at the beginning and many companies have only just started the transition from paper-based reporting and aggregating data sets. But the SEC ruling has set a clear pathway that many US companies will have to follow.
Crucial to reaching the requirements will be how landlords and tenants come together to jointly tackle the need for data and put the processes in place to make this possible. Organisations need improved internal data collection protocols and technology to collate information into a singular report to meet these new audit requirements. This technology will be central to streamlining reporting and then to help change how we use buildings, reducing emissions and helping the journey to net zero.
Matthew Fitzgerald is director of Savills’ EMEA cross-border tenant advisory team and Jade Bonney is a graduate surveyor at Savills
