SEC Unveils New Emission Standards, Much To The Relief Of CRE

The Securities and Exchange Commission voted 3-2 Wednesday morning to approve rules that would initially require large corporations to report part of their carbon emissions, but not Scope 3 emissions.

The new rules apply to major landlords, among other operators in commercial real estate, and come after a comment period lasting about two years.

“These final rules build on past requirements by mandating material climate risk disclosures by public companies and in public offerings,” SEC Chair Gary Gensler said in a statement Wednesday. “They will also require that climate risk disclosures be included in a company’s SEC filings, such as annual reports and registration statements rather than on company websites, which will help make them more reliable.”

The regulations would first apply to companies with at least $700M in publicly held shares. Such companies are required to report Scope 1 and Scope 2 emissions, which include emissions created by direct activities like burning fuel to heat a building and indirect activities like using electricity, respectively.

The proposed regulations had been subject to intense pushback, and that effort has yielded fruit, with regulations considered the most onerous, Scope 3 reporting, gone from the new rules.

Scope 3 emissions are hard to define, which adds to the difficulty of trying to measure or regulate them, but are generally thought of as indirect emissions encompassing the entire carbon footprint of a company's operations. For CRE, this means embodied carbon, which comes from construction and eventual demolition of property.

“This rule received most public comment letters, which shows the willingness of investors to engage on the policy and then the regulations,” said Will Sullivan, a senior policy analyst at Principles for Responsible Investment, an environmental, social and corporate governance advocacy group.

Investors have been trying to access information on emissions for some years, Sullivan said. 

Also, he said, passing rules solidifies the idea that the SEC believes that climate risks are economic risks.

PRI was supportive of including Scope 3 emissions reporting, Sam VanderMeulen, also a senior policy analyst at the organization, told Bisnow, but he added that this rule is better than no rule.

“There will be engagement from investors on the inclusion, or lack thereof, for Scope 3 going forward. But to a large extent, this rule does provide a really important baseline,” VanderMeulen said.

Reporting Scope 3 emissions is considered a bridge too far by some in the real estate industry because it encompasses emissions resulting from building occupant use. Property owners typically don’t have control over such emissions caused by tenant operations and have a hard time measuring them.

Getting a handle on Scope 3 emissions, as tricky as it might be, is a key step in decarbonizing the built environment worldwide, experts say, as Scope 3 represents 90% of building emissions.

The loss of Scope 3 itself didn't surprise Visual Lease Principal ESG Solutions Advisor Bill Harter, whose company is a lease administration and ESG carbon tracking platform.

“It was the political hot potato,” Harter said. “But I am surprised that they didn't make any sort of a nod towards interoperability towards companies that might have to report emissions in other jurisdictions.”

In this context, a lack of interoperability would mean that reporting emissions elsewhere, such as the EU, wouldn't necessarily match U.S. standards, which could complicate matters, he said.

“The fact that they're aggressively out there saying no, the U.S. has got to have its own standards, we're going to be different, was a bit of a surprise to me,” Harter said.

Bisnow found in an investigation last year that the vast majority of the world’s 75 largest landlords, including institutional investors, REITs and investment managers, track neither the emissions created by their tenants nor the carbon emitted during the development of their buildings. Among the companies that have set targets to decarbonize their portfolios, less than a quarter track Scope 3.

The rulemaking process for the SEC has been anything but routine given the backlash, which included public statements, lobbying by the real estate industry and the threat of legal action. 

Under the new rules, companies would make climate disclosures in annual filings with the SEC and statements filed before an initial public offering. Until now, that hasn't been a common practice in most industries.

Other jurisdictions are also moving in the direction of more robust emissions reporting, especially California.

Senate Bill 253, which the California Legislature passed and Gov. Gavin Newsom signed in 2023, directs the California Air Resources Board to adopt regulations requiring businesses with annual revenues of $1B or more that do business in California to publicly report greenhouse gas emission data for themselves and their entire supply chain.

UPDATE, MARCH 6, 4:56 P.M. ET: This story has been updated with comments from SEC Chair Gary Gensler and commercial property professionals.