The scorching heatwaves and wildfires blazing through much of Europe and the US this week – including record high temperatures in the UK that made the government declare a national emergency – were yet another reminder of the urgency of tackling climate change.
Juxtapose this with a report from ratings agency Sustainable Fitch this week that said the US Supreme Court’s decision on the country’s Environmental Protection Agency – which ruled the agency did not have the authority to regulate the carbon emissions that cause climate change – could also put the Securities and Exchange Commission’s proposed climate disclosure rules in jeopardy. The rules, which were released for public comment in March, are slated for adoption later this year.
The real estate industry, in being a major contributor of carbon emissions, certainly has its role to play in reducing emissions. The growing number of managers and investors that have pledged to achieve net-zero emissions over the next few decades is evidence of this. But it is only by gathering data on the current emissions from their portfolios that managers and investors can track and measure their progress toward becoming carbon neutral. As the climate disclosure-focused non-profit CDP says: “Disclosure is the first step to driving environmental action.”
Let us put extra emphasis on “first step” – gathering data is a challenging, complicated process that involves many properties, tenants and partners, as PERE previously reported. There are many additional steps that an organization must take before it can reduce its carbon footprint. And given the climate crisis looks increasingly dire and the industry has historically been slow to act on environmental issues, real estate groups do not need to wait for direction from regulators to improve their climate disclosures.
The SEC’s proposed rules would require public companies to be more transparent about the climate-related risks that could affect their businesses. Certainly, many of the largest private real estate businesses are part of public companies – they account for six of the top 10 alone in the PERE 200, including Blackstone, Brookfield, ESR, BentallGreenOak, The Carlyle Group and Ares Management. But whether those rules are now in jeopardy because the Supreme Court could potentially invalidate them really should not matter.
This is because the industry already has multiple disclosure frameworks to use as guidelines. Indeed, the SEC noted in March that “the proposed disclosures are similar to those that many companies already provide based on broadly accepted disclosure frameworks, such as the Task Force on Climate-Related Financial Disclosures and the Greenhouse Gas Protocol.”
It is worth pointing out that both of the aforementioned frameworks are voluntary, which give them less teeth than the proposed SEC rules, which would be mandatory. But many global private real estate managers are already required to comply with the EU’s Sustainable Finance Disclosure Regulation, whose key data requirements include a company’s greenhouse gas emissions. Under SFDR, which came into effect March 2021, all financial market participants will need to be in full compliance by 2023 following a transition period. If a firm is not already voluntarily making climate disclosures, it will be required to do to operate in Europe under SFDR.
The urgency of the climate crisis – of which this week’s searing temperatures served as a stark reminder – demands that the normally reactive industry not further delay on taking climate action. That means, at a minimum, managers and investors making climate disclosures even when they are not compulsory. After all, when it comes to climate risks becoming financial risks, private real estate is one of the industries that has the most at stake.