A sense of urgency around climate change is driving demands for responsible and sustainable investment opportunities in commercial real estate. Shareholders of public companies are calling for more information about the risks that climate change could pose to their investments. As Gary Gensler, chairman of the SEC, said, “Investors are looking for consistent, comparable and decision-useful disclosures so they can put their money in companies that fit their needs.”
New environmental disclosure rules recently proposed by the SEC would make it easier for investors to make informed investment decisions. If the environmental disclosure rules — or whatever portion of them survives public comment — are implemented, companies will have to track, measure and report specific, climate-related financial and environmental data. With measurable and transparent data, the sustainability performance of any building will become part of an objective and competitive database used at every level of the real estate business, from leasing to buying and selling to funding.
Regulation’s impact on investors
This new information disclosed by companies would allow investors to more easily make apples-to-apples comparisons between investment opportunities, which will have a significant impact on publicly traded REITs, and knock-on effects for private real-estate funds. Although leading REITs already integrate a wide range of ESG best-practices into property operations, there are many inconsistencies in reporting methodologies among companies. The SEC rules would help to standardize reporting on environmental factors, especially around carbon emissions and exposure to physical climate risks such as heat stress, flooding and other factors at the asset level.
With information on carbon emissions and climate risk across public companies, real-estate investors would be better able to review these metrics and factor them into choices they make about where to allocate their funds. They may find themselves changing their investment strategy or geographic focus as a result.
If you’re an investor in a real-estate fund that ends up on the worse side of the range of carbon emissions and climate risk reported throughout the marketplace, there’s a chance your finances will suffer as a result as other investors move toward less risky funds and the riskier funds become more difficult to sell. This isn’t always the case — beachfront properties are at high risk from climate change, but their value keeps going up. Still, the general assumption is that riskier funds will suffer financially.
Real estate’s important role
Buildings currently generate close to 40% of annual global CO2 emissions. Of those total emissions, building operations are responsible for 28% annually, while building materials and construction (also known as embodied carbon) are responsible for an additional 11% annually. This makes the real estate industry an essential factor in any effective environmental action plan. Until we start measuring, analyzing and disclosing its impact, we won’t be able to truly address the threat of climate disasters.
In order to maintain fair, orderly and efficient markets, the SEC has always required companies to disclose a range of information that poses a “material” risk to their business. With the new disclosures, investors and bond ratings agencies will be better equipped to add environmental risks to their calculations to achieve greater market predictive capacity. Standardized data disclosures can also reveal companies that are falling behind their peers in implementing environmental solutions, leaving them less attractive to investors and more vulnerable to negative publicity and pressure campaigns.
Although the U.S. represents the world’s largest real estate market, it currently lags other countries, most notably those in the EU, in setting climate disclosure rules in line with recommendations from the Task Force on Climate-Related Financial Disclosures. The SEC would make mandatory what had been the TCFD’s voluntary climate-centered financial disclosures, which have been used by companies, banks and investors to provide information to stakeholders.
New tools provide clarity
If the proposed SEC regulations are adopted, voluntary environmental disclosures based on arbitrary standards will no longer be acceptable, and “greenwashing” will be much more identifiable. As real estate investors increasingly seek to steer money toward safer, higher-performing green assets, they will also demand tools that can provide timely, accurate and auditable data.
Technology will have to play a critical role in delivering this data, because no human-based solutions could creditably track, sort, collate, analyze, compare and disclose the vast amounts of information that need to be managed under the new regulations. Sophisticated tools will be essential to produce the performance data that will enable investors to assess their exposure to climate risk.
Increasingly dire forecasts regarding the impact of global warming, such as the UN’s recent IPCC report, have brought home the realization that climate change will be affecting real estate much faster and much harder than expected. The SEC’s proposed regulations would be a big step forward for investors, giving them clear and consistent information that enables them to make investments that are responsible, sustainable — and profitable.
Matt Ellis is founder and CEO of Measurabl.