Q&A | Why have SEC climate rules rattled real estate?

The US Securities and Exchange Commission has proposed new rules that would require companies to disclose a raft of climate-related metrics, drawing criticism from some major investors.

What has the SEC proposed?

Under the regulator’s proposals, public companies would be required to disclose information about:

  1. Impact: the effects that climate change is likely to have on assets in the short, medium and long term
  2. Strategy: how will the company mitigate climate risks? What are its targets and transition plans?
  3. Facts and figures: total scope 1 (direct), scope 2 (indirect) and “material” scope 3 (supply chain) greenhouse gas emissions

There would be a phase-in period for all companies, and an additional phase-in period for Scope 3 emissions disclosures.

When would it come into effect?

Large companies would have to comply with these rules from the 2023 fiscal year. Smaller companies would have an extra year to prepare.

Are scope 3 emissions the source of concern?

Yes. Anyone paying attention to recent reports from the likes of CBRE or JLL will be aware that supply chain emissions are a massive sticking point.

Complexity and lack of control make these emissions much harder to track than scopes 1 and 2. This is particularly difficult if a company has clients or contractors based in countries that require less transparency.

In its response to the SEC, BlackRock wrote: “[W]e do not believe the purpose of scope 3 disclosure requirements should be to push publicly traded companies into the role of enforcing emission reduction targets outside of their control.”

That can’t be all, can it?

Another issue is whether these rules are too prescriptive. The Real Estate Roundtable and Nareit recommend a “principles-based” approach that would allow for some flexibility, given that building emissions depend on variables that vary between sectors, occupiers and location.

At the same time, BlackRock raised concerns that parts of the proposal “go beyond or differ from” recommendations from the Taskforce for Climate-related Financial Disclosures, the reporting framework BlackRock aligns with and which is mandatory in a growing number of countries.

Inconsistent requirements, BlackRock argued, could lead to a number of unintended issues. These include private companies being disincentivised from going public and public companies having to police their value chain’s disclosures.

Has the reaction been completely negative?

No. In fact, much of the criticism from asset managers is couched in support for climate disclosures in general.

For example, BlackRock supports mandatory climate-related reporting aligned with TCFD and is in favour of requiring scope 1 and 2 disclosures. Meanwhile, the influential Investment Company Institute recently came out in favour of mandatory disclosures, reversing its earlier support for purely voluntary reporting.

Will real estate have to do more than just report climate metrics?

Landlords can expect to hear from occupiers who will be scrambling to get on top of their emissions. As McKinsey recently highlighted, this would affect both public and private real estate companies with public stakeholders. The industry must be ready to share the data tenants need and work with them on cutting emissions.

Could these rules affect real estate values?

In theory, yes. Like other tightening climate regulations around the world, these SEC rules will fuel concerns that buildings with lower standards will be ‘stranded’ in the future.

Requiring tenants and investors to report on their emissions and climate strategy could force them to decarbonise their real estate footprint. As a result, landlords with sub-par assets could find themselves owning buildings that no longer attract key tenants or lenders.

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