On March 21, 2022, the U.S. Securities and Exchange Commission (SEC) proposed a rule to improve and standardize climate-related disclosure for investors. & # XD;
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If applied as written, the standard would require public emitters to disclose significant climate risks, greenhouse gas (GHG) emissions, and, where appropriate, emission reduction targets and transition plans.
The proposed SEC rule would affect the real estate world in two key ways. First, it would apply directly to listed real estate companies and real estate investment trusts that are registered with the SEC. & # XD;
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Real-estate companies have an opportunity to respond to the SEC’s proposal preemptively
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Tenants will soon be calling
Second, it would apply indirectly to the vast majority of large property owners. A significant number of corporate tenants, real estate lenders, and real estate investors are public entities that would be covered by the SEC rule and therefore would have to disclose their real estate holdings. Since real estate is an important component of GHG emissions in areas 1 and 2 & # xD;
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Investors will have a new set of needs as the ‘Great Repricing’ accelerates
for players in most industries, meeting SEC reporting requirements is impossible without understanding emissions from real estate footprints. If enacted, the SEC rule would mean that both public and private real estate companies must provide this information to their tenants, investors, lenders, and other stakeholders.
While the rule may be challenged, the proposal is likely to have a significant impact on the real estate sector. To see also : Biden calls the former head of DARPA as scientific advisor. In recent years, some real estate players have developed a growing awareness of the need to incorporate both climate-related risks and emissions into their valuation, decision-making, operations, reporting and pricing. & # XD;
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Others have progressed more slowly. The proposed rule introduces the idea that climate disclosure is critical to managing any real estate business.
Real estate companies are likely to receive calls soon from their tenants and investors looking for emission figures, risk disclosure and emission reduction plans. Tenants and investors may be concerned about meeting the requirements of the proposed SEC standard or doing the same for other regulations that may arise. They may want to work with companies that can provide current emissions and risk reporting, ongoing assessments as the weather changes, and options for reducing emissions.
Real-estate players with climate intelligence and capabilities will stand out
For tenants and public investors, the requirement to disclose real estate climate risks and emissions provides another reason to reduce emissions and help their stakeholders and customers do so. On the same subject : Secretary Blinken’s trip for the Minister of Food Security to host Germany and the G7 Summit with NATO – US State Department.. One advantage may be that those who do well and soon have a competitive advantage.
For the real estate sector, the persistent question around climate change has always been: what will be the catalyst for decisive collective action? The rule proposed by the SEC gives an answer: now is the time to act.
Listed companies in all sectors are preparing for the possible implications of the disclosure rule proposed by the SEC (exposure). Real estate companies would be wise to prepare for questions about climate risk from tenants, investors, lenders, and other stakeholders. They can use this knowledge to revalue and re-evaluate their real estate portfolios and ultimately differentiate themselves in the market by offering the most complete and effective emission reduction solutions.
What can real-estate companies do today?
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Tenants who rent commercial real estate for non-real estate businesses may be contemplating for the first time that the physical spaces they occupy contribute to emissions and expose them to climate risks. They will need answers from their real estate partners.
The simplest questions will include the broadcasts, including the following:
From the disclosure requirements, more complex questions will arise about the material impacts and specific risks to organizations’ physical footprints, such as the following:
Answering these questions requires understanding the details of the physical hazards in a specific place and the extent to which these hazards could affect the operation of a building (such as whether a flood could disable the building’s mechanical systems or whether those systems are in roof). ).
Real estate investors may be familiar with the concepts of green building, but they should get used to the idea that all of their portfolios will likely need to be re-examined through a climate lens.
We have argued in previous work on climate risk and the opportunity for real estate that climate emissions and impacts will soon be important drivers of the value and performance of real estate assets. These impacts can have a positive and negative effect on the value of a particular real estate asset.
On the plus side, real estate can help companies meet their emission reduction targets, and tenants are likely to invest more in climate-ready real estate assets because of the long-term savings from risk mitigation. climate and regulatory. Insurance costs, utility costs, and other costs (such as repairs and maintenance) may decrease in these buildings due to better physical endurance. In turn, the value of these assets could be higher due to more attractive revenue and operating cost profiles. As a corollary of these direct impacts on the property’s net operating income (NOI), as investors seek to decarbonize and reduce the climate risks of their portfolios, the attractiveness of assets will vary depending on its emissions and risks, and capitalization rates will reflect this.
In contrast, buildings at risk of increasing physical hazards or with higher emission profiles will decrease in value over time, as industry players understand, take into account and report on climate-related risks. Insurance costs, utility costs, and other operating costs may be higher on these properties.
Until now, the impact of climate on the performance and valuation of real estate assets had been felt mainly by selected pockets of the most obviously exposed real estate. However, as thousands of businesses begin to understand the emissions and risks that emanate from their real estate options, this information will become clearer and more widely distributed.
How is carbon footprint calculated?
It is easy to imagine that this awareness creates a demand from tenants for the performance of low-emission buildings by their owners and for lower-risk locations or buildings. As tenants migrate, it follows that lenders and investors would do the same. The result is a phenomenon we call the “great revaluation,” a reordering of the value at which some assets would devalue, some would get stuck, and some would become more attractive. Still others could be significantly renewed and repositioned in light of these changes.
- We believe that the growing climate awareness that ultimately translates into Grand Repricing will occur whether the rule proposed by the SEC becomes a reality sooner or later. However, by focusing the attention of all public companies on climate risks and emission profiles in their real estate footprints, we believe the proposal will speed up the process.
- As the Great Repricing unfolds, opportunities will arise for real estate players to understand how climate factors affect their portfolios and asset values and can respond in ways valued by tenants, lenders, and investors.
- Climate sensitivity will become a new basis for differentiation throughout the value chain. Companies that create reporting systems to support tenants, lenders, and investors in meeting their disclosure requirements will be more attractive as partners and landlords. Homeowners who help occupants reduce emissions through refurbishment, low-carbon building systems, and ancillary forms, such as solar power generation or electric vehicle charging, can gain a competitive advantage by offering these value-added services. Individual buildings with less carbon and less risk will be highly differentiated, as will markets with less risk.
- Real estate players who develop intelligence and climate skills can be separated from the group. While the race had already begun for some, the SEC has now fired the starting gun for the entire industry.
- There are many reasons why the real estate industry needs to make changes to combat climate change and prepare for its effects. First, real estate assets are vulnerable to long-term climate risk which can be very expensive. Second, real estate companies have their own commitments to reduce emissions — in some cases in response to investor demand — and to comply with current regulations. The SEC’s proposal can be seen as a third reason and an accelerator of the above imperatives.
Given the changes in the real estate horizon, real estate agents should consider several actions:
What is stranded asset risk?
Real estate companies can effectively understand their benchmark issues, find ways to reduce those issues cost-effectively, and report on those reductions. This is a good time to take stock of the organization’s capacity, experience, and emissions data needs.
Companies need to determine what people, capabilities, tools, and processes they need to understand the emissions of each property. They should determine what knowledge is needed to find the most cost-effective ways to reduce emissions and what execution capacity is required to deliver reductions.
What are examples of stranded assets?
It will be important to establish a coordinated governance structure between real estate transactions, asset management, risk, finance and other functions to ensure that this engine is effective.
What is stranded oil?
Reducing emissions and addressing material impacts will likely require different forms of engagement with a broader set of stakeholders than many real estate companies are accustomed to. It can also be important to have a single leader responsible for connecting these threads to the entire business. This leader can develop coalitions that drive emission reduction in areas that are not under the direct control of the owner. Partnering with utilities can help with electrification and efficiency efforts; working with banks can unlock lower-cost financing for energy efficiency upgrades; and working with local municipalities could create development bonuses that allow a building with fewer emissions or improve the availability of public transportation.
What are stranded assets energy?
Now is the time to develop a clear understanding of the impact of climate on asset performance and value. It is important to anticipate the impact of changing physical risks such as fires, floods, storms and heat on the underlying asset economy. Equally crucial is understanding what a decarbonized economy means for a company’s markets, tenants, asset NOI, and capitalization rates. To make the most of knowledge about material impacts, knowledge does not have to remain isolated within the risk function, but becomes a capacity that runs throughout the organization.
What is meant by systemic risk?
Turning knowledge about climate impact and reducing emissions into value requires the active participation of real estate agents. For example, if a real estate company makes changes to a building that reduces energy consumption, thereby reducing associated emissions, it should also develop a new lease structure that recognizes the building’s lower utility costs. the “green premium” (the benefit to the tenant). derive from the occupation of such a building). Other innovative approaches could also be followed, such as financial partnership with tenants, lenders, or equipment suppliers to make the changes. Changes in assets that create climate resilience can lead to an advantage not only with tenants, but also in capital allocation, investment decisions, and asset management. Many older players should consider developing an advanced analytical capability to ensure that climate knowledge effectively informs decisions throughout the business.
Now is the time to develop a clear understanding of the impacts of climate on asset performance and value.
Why there is systemic risk?
Real estate plays a key role in ensuring the decarbonization and resilience of our economies and communities. While many of the changes described in this article are already underway, the SEC announcement is likely to accelerate them and create both urgency and opportunities for key real estate players to respond.
What are the types of systemic risk?
How to calculate your carbon footprint
Is Covid 19 a systemic risk?
Multiply your monthly electricity bill by 105.