Climate rules increase pressure to rethink leases

Moves to make climate reporting mandatory in countries around the world will force landlords to adopt leases with data sharing clauses, experts have warned.

Launched five years ago, the Task Force on Climate-Related Financial Disclosures has developed a reporting framework that is increasingly becoming the basis for green legislation in many jurisdictions.

From April 2022, the UK’s largest registered companies and financial institutions have to make disclosures in line with TCFD recommendations. In the US, the SEC has similarly proposed mandatory climate-related disclosures in the public markets.

Other jurisdictions with official TCFD reporting requirements include the European Union, Singapore, Brazil and Canada.

“Real estate contracts will have to evolve to allow certain levels of data sharing for the sake of compliance with regulatory disclosure rules,” Erik Landry, director at ESG benchmarking organisation GRESB, told PlaceTech.

TCFD includes four core elements…

• governance
• strategy
• risk management
• metrics and targets

…each with several recommended areas of disclosure.

As part of these disclosures, companies are expected to report on their own emissions and those of their value chain (called Scope 3 emissions). For real estate, that includes tenants’ emissions.

Data could be a problem

Landry said: “At some point in time, you will also be required to provide your Scope 3 emissions, and sometimes this is very difficult for building owners and landlords to do because they don’t have access to that data.”

Some types of leases pose particular problems for data sharing, Landry said. These include triple net leases, in which landlords effectively hand over control to the tenant.

As a result, plans to make TCFD-aligned disclosures mandatory have been met with pushback from real estate.

Some industry groups and companies have advocated for disclosures to be optional, while others want to see safe harbour clauses adopted, which would mean that the SEC, for example, could not hold them responsible if their disclosures are inaccurate, as long as they were done in good faith.

Leases are evolving

Despite trepidation among some landlords, larger developers in particular are taking the initiative when it comes to requiring data-sharing clauses.

Victoria Towers, partner in the commercial real estate team at Forsters, said: “We’re certainly seeing more clients coming forward now, really being more forensic about what their green lease provisions require.”

The challenge is including clauses that tenants are happy to agree to. Forsters’ real estate clients, for example, often want to extract data from their buildings directly through meters that they install or by going through the providers. “Obviously, tenants do tend to have reservations about that sometimes, so it’s trying to find a reasonable middle ground,” said Louise Irvine, Forsters’ senior knowledge development lawyer.

Forsters’ corporate clients have been as keen to have green clauses as landlords themselves. Towers said some are pushing for even more stringent clauses than those landlords themselves would suggest. After all, they have their own disclosures and targets to meet.

Landlords and tenants are considering provisions around the energy providers tenants can use – pushing them towards greener options – encouraging them to use solar panels if the landlord has them installed. Other clauses include avoiding gas where possible, and using electricity instead.

Irvine said: “I think that’s all very much being driven by knowing that they’re going to have to disclose and work towards targets quite quickly.”

Forsters clients, however, are generally “sophisticated”, whether they are a fund, a developer or a tenant, according to Towers and Irvine. Smaller businesses are less likely to have the skills or funds to focus on TCFD compliance. This puts an onus on those larger landlords to work with their tenants for the mutual benefits of having green and data-sharing leases before mandatory disclosures kick in.

Towers said: “It’s really important that the SMEs, which are perhaps less financially able to deal with green requirements are brought on the journey.”