Based on self-reporting, many of the commercial real estate firms subject to the United States Securities and Exchange Commission’s (SEC) pending climate-related disclosure rules are grappling with how they will comply. Just 12.5 per cent of respondents to a recent poll conducted by the Open Standards Consortium for Real Estate (OSCRE) indicate they have the data management systems in place to collect and coordinate the raft of information that will have to be presented to investors.

That includes:

• an inventory of “reasonably likely” climate-related risks to which investables are exposed;
• an associated explanation of how those risks potentially may or already have affected business operations/planning and financial outcomes; and,
• a comprehensive slate of details about the actions taken to reduce those risks.

As well, where public investors hold at least USD $70 million worth of equity, such companies will be mandated to disclose their scope 1 and 2 greenhouse gas (GHG) emissions. That encompasses GHGs directly emitted from sources within their portfolios and GHGs attributable to the production of electricity and/or steam their portfolios consume.

“The rules will provide investors with consistent, comparable and decision-useful information, and issuers with clear reporting requirements,” SEC chair Gary Gensler said when the final version was released earlier this year. “Further, they will provide specificity on what companies must disclose, which will produce more useful information than what investors see today.”

More than two-thirds of participants in the OSCRE poll reveal they have not yet taken action, are still trying to understand the requirements or are in the process of determining what new types of data they will need to obtain. About 19 per cent have completed an assessment of where pertinent climate-related data is generated within their organizations and are preparing to begin harvesting it.

OSCRE’s analysis of these results notes that affected companies could have begun considering the potential implications as early as March 2022 when the SEC first unveiled the draft rules for consultation. However, lollygaggers still have some time to catch up as the final version faces court challenges,

In April, the SEC voluntarily paused the enactment process while those challenges proceed, but also declared confidence in the rules’ validity. “The Commission is not departing from its view that the Final Rules are consistent with applicable law and within the Commission’s long-standing authority to require the disclosure of information important to investors in making investment and voting decisions,” states the SEC’s stay order.

Diligent companies worldwide contemplate how to comply

There is general consensus among many affected parties that the disclosure mandate will take effect relatively soon and diligent companies listed on exchanges in the U.S. should get ready. Meanwhile, Canadian Securities Administrators (CSA) is in the midst of a similar rule development process in Canada and the SEC rules are considered instructive since CSA has stated it will look to other international examples as it finalizes its own requirements.

Many Canadian companies that are listed on U.S. exchanges — including all start-ups making initial public offerings — will be directly affected, although larger players that are dual-listed on the TSX and U.S. exchanges typically fall under the auspices of SEC’s multi-jurisdictional disclosure system and will remain subject to CSA requirements. Regardless, investors at home and abroad can increasingly expect access to standardized insight on how assets may be exposed to climate-related risk and what investment managers are doing to address it.

“It is really part of global momentum for greater transparency around climate-related physical and transition risks,” Paulina Torres, JLL’s research manager for ESG and sustainability, observed during a recent webinar exploring global real estate trends. “This is happening across markets and outside the U.S.. Canada, the United Kingdom, Europe, Australia and, most recently, China have all implemented or proposed mandatory ESG disclosure with first reports due by 2026 or earlier.”

The SEC’s phased compliance schedule would see the largest listed companies (categorized as large accelerated filers), in which public investors hold at least USD $700 million worth of shares/units, begin to report scope 1 and 2 emissions in their 2026 annual reports and registration statements, followed by a first assurance report in 2029. Listed companies in which public investors hold USD $70 million to $699 million in shares/units (categorized as accelerated filers) would commence reporting in 2028 with the first assurance report set for 2031. Other climate-related information would be due earlier — in 2025 for large accelerated filers and 2026 for accelerated filers.

Smaller listed companies are expected to begin disclosing required climate-related information in 2027, but will be exempt from reporting scope 1 and 2 emissions. As well, all companies must affix electronic tags to climate-related information within their reports and registration statements.

Familiar and emerging data categories

For subject commercial real estate companies, tallying scope 1 and 2 emissions could actually be the easier component of compliance. It’s also projected to have spinoff benefits for those that have favourable findings to report.

“Many corporates are already tracking this data because of the ESG targets that they have in place at the corporate level,” Torres said. “That data measurement will essentially shine a light on a building’s energy performance, and you can expect tenants to increasingly seek operational efficiencies from their spaces when they’ve got access to energy data through these disclosure requirements.”

Requirements to assess and disclose how climate-related risk materially affects portfolios calls for a broader range of data, which is not always so straightforward to collect. To date, organizations like OSCRE and GRESB, the overseer of a global benchmark for the ESG performance of commercial real estate portfolios, have been among the more proactive agents in developing and promoting standardized metrics.

Speaking during a recent webinar sponsored by the Real Property Association of Canada (REALPAC), Erik Landry, GRESB’s director of climate change, acknowledged that the combination of emerging regulatory dictates and corporate ESG-driven initiatives has spawned a proliferation of data and data providers.

“With that proliferation came the hunt for the best data. Well, spoiler alert: there is no best data. It really depends on your use-case and what you want to use that data for,” he reflected. “The environment is changing; the data is changing; the methodologies are changing. So we’re putting an emphasis on continuous improvement and making sure that these processes reflect the most up-to-date understanding and best practice.”

OSCRE is approaching the challenge from a data management angle, as it continues on its ambitious agenda to forge consistency in the collection, management, reporting and transferability of environmental data. It underscores the importance of master data management to implement a shared framework for data accuracy, consistency, accountability and stewardship within an organization.

“A holistic approach will enable them to collect, analyze and report data across multiple reporting platforms without significant human manipulation of data, which will ultimately reduce the time needed to collect, analyze and report environmental data,” the analysis of its recent poll results maintains.