How The SEC’s New Climate Rule Will Change The Real Estate Industry
While the SEC’s new requirement for disclosing climate-related risks applies to large, publicly traded companies, it’s already having ripple effects throughout the construction industry. Development is intricately linked with the finance sector. And, in anticipation of this rule, the investors have been paying more attention to the sustainability performance of real estate assets.
In practice, this means everyone involved — investors, developers, design professionals, builders, and building users — will focus more resources on decarbonizing new and existing buildings. There are three areas the industry will continue to change: electrification, more on-site solar power, and less embodied carbon.
But first, what’s required by the SEC’s climate disclosure rule? Check out the SEC’s press release and SEC Chair Gary Gensler’s short video synopsis. Long anticipated, the rule is roughly aligned with California’s carbon disclosure laws SB 253 and SB 261. By making climate-related risks more transparent, the rule will incentivize investors to manage those risks. One of the most direct ways to do that is through decarbonization of the real estate sector, one of the largest contributors to greenhouse gas emissions.
Decarbonizing a portfolio is a daunting challenge. One way to get started is to break the work into three efforts that track with each type or “scope” of emissions as defined by the Greenhouse Gas Protocol.
Scope 1 – Electrify: Scope 1 emissions are from direct sources such as natural gas combustion and refrigerant leaks. Portfolio managers look to electrification to address the lion’s share of Scope 1 emissions. An energy audit across assets is a fast way to prioritize renovation projects. This also highlight building that are wasting energy due to poor insulation, air leaks, and aging systems. By addressing building performance holistically, managers can reduce the cost of replacing combustion equipment with electric heat pumps.
Scope 2 – Install Solar Power: Scope 2 emissions are indirect because they are caused by electric utilities that sell power to buildings. After addressing any wasted energy and electrifying the portfolio, reducing electricity provided by these utilities is the next step towards decarbonization. Begin by evaluating the best assets for producing electricity alongside any local incentive programs. Ultimately, most building sites are reasonable candidates for on-site power production. To achieve net zero operating emissions, the final step is optimizing the building’s demand with the grid’s capacity – often utilizing thermal storage or batteries.
Scope 3 – Reduce Embodied Carbon: Scope 3 emissions are also indirect, but are caused by other goods and services within an organization’s value chain. In the context of the construction industry, where the value chain is delivering usable square footage, Scope 3 emission are embodied carbon. These emissions are the result of manufacturing and installing materials for a new building or renovation. During the design process, expert consultants can help advise on (and document) strategies that reduce embodied carbon. As we electrify buildings and develop cleaner energy grids, up-front emissions from the construction process will become the largest carbon contributor.
The SEC’s rule is an acknowledgement that climate risk has economic impacts. The support of the finance sector will accelerate the construction industry’s decarbonization efforts and help create more resilient assets for building users. When evaluating a portfolio for ways to reduce climate-related risks, remember it’s as easy as Scope 1, 2, and 3.
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