In a move that could benefit investors, the U.S. Securities and Exchange Commission is proposing new rules that would require public companies to disclose certain climate-related risks in their periodic reports and financial statements, including greenhouse gas emissions and other major metrics.
“From a commercial real estate perspective, it’s not super new. What the SEC does is it guides companies and tells them how to report on certain important things to investors, their financials, and regular reporting,” said Tony Liou, president of Energy Partners, a nationwide provider of energy efficiency engineering, sustainability and climate risk consulting services.
“The SEC is really setting a methodology for transparency and reporting, and it’s at the behest of investors. A lot of commercial real estate folks – institutional investors and managers of real estate – they’ve been tracking and disclosing and setting goals around climate change and carbon emissions for quite a few years now, but this makes it a requirement.”
Should the proposal be passed, publicly traded companies would be required to disclose information that would likely have a material impact on business, results of operations, or financial condition.
In summary, the proposed rule changes would require companies to disclose information about their climate-related risks as well as their risk management processes, information on ways these risks have had or are likely to impact finances, information on how climate-related risks have impacted the company’s business model and outlook and information on the impact of climate-related events, such as natural disasters, and how they have affected the company’s current financial statements and future estimates.
The proposed rule changes also would require companies to disclose information about their direct greenhouse gas emissions as well as indirect emissions, such as from an outside energy company.
“Once you bring transparency to carbon emissions, I think there’s going to be a drive to further reduce it. If that’s the goal, measuring it is certainly a reasonable thing to do. We’ve been recommending folks do that forever. If carbon or energy efficiency is part of your goals, you have to measure it,” Liou said. “After you measure it, you have to put a plan together, reduce it and then track it over time.
If passed, the proposal includes a phase-in period, which would allow companies a period of time to adjust to the new rules. According to the proposal, the time would be dependent on a company’s filing status. An additional phase-in period would be added for greenhouse gas emission disclosures as well.
According to the SEC, the proposed disclosures are not very different from current disclosure frameworks put into place by the Task Force on Climate-Related Financial Disclosures and the Greenhouse Gas Protocol, which both provide widely-used guidance for companies to measure, manage or limit greenhouse gasses. While many commercial real estate companies follow similar guidelines, the proposed regulations from the SEC would make them required.
However, for those who have not been making these steps, Energy Partners suggests several ways investors and property owners may prepare for the potential passage of the proposal. Because these guidelines have already been widely implemented, Liou suggests companies reach out to other companies who are already practicing under these guidelines to get a better understanding of changes that may need to be made. Environmental, social and governance (ESG) firms also can be a useful tool to companies looking to be more compliant to the proposed changes.
“For this to work effectively, these processes need to be ingrained in the way real estate companies are run, so that it is not so much an afterthought anymore; it’s not a side project. It just simply needs to be ingrained into their best practices,” Liou said. “I think it will fundamentally also change the way we valuate real estate. Again, what this does is drives transparency, giving us additional data points to measure the value or the risk of real estate.”
The climate-risk disclosure regulations were proposed in late March, but they still have a long way to go before receiving approval. Currently, the proposal is in a public comment period through May of 2022, with a final decision to come in the months following.
“Our core bargain from the 1930s is that investors get to decide which risks to take, as long as public companies provide full and fair disclosure and are truthful in those disclosures. Today, investors representing literally tens of trillions of dollars support climate-related disclosures because they recognize that climate risks can pose significant financial risks to companies, and investors need reliable information about climate risks to make informed investment decisions. Today’s proposal would help issuers more efficiently and effectively disclose these risks and meet investor demand, as many issuers already seek to do. Companies and investors alike would benefit from the clear rules of the road proposed in this release. I believe the SEC has a role to play when there’s this level of demand for consistent and comparable information that may affect financial performance. Today’s proposal thus is driven by the needs of investors and issuers,” saiad SEC Chair Gary Gensler.