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Buildings Are a Massive Climate Problem, New Federal Climate Disclosure Rules Can Help

The economic toll of Hurricane Ian is still being tallied, but some are estimating that the storm could cost insurers up to $63 billion. If it wasn’t clear before, it should be obvious by now that the real estate industry faces a reckoning with the climate crisis. With a trillion-dollar portfolio of assets that account for more greenhouse gas emissions than any other sector of the economy and the lion’s share of economic damages from disasters, the buildings sector is simultaneously a primary driver of the changing climate and a primary casualty of the climate-related havoc being unleashed across the world. 

While a massive undertaking, these are problems that markets can help solve. But they can do so only when they operate with a clear understanding of risks and opportunities, which explains why the U.S. government is moving aggressively to strengthen transparency around the economic impacts of climate change.

Earlier this year, the Securities and Exchange Commission proposed requiring publicly-held companies to begin reporting hard data on both their greenhouse gas emissions and their climate-related risks. And just last month, the Treasury Department proposed collecting localized climate risk data from insurance companies, which the department said is “needed to help assess the potential for major disruptions of private insurance coverage.” 

The proposals reflect the increasing recognition in the business community that climate change is more than just an environmental threat; it’s a near-term threat to the bottom line. “I can’t talk to an asset manager today who says they’re not concerned about climate at all. No one says that,” Morningstar’s John Hale recently told CNBC. The new federal proposals have the potential to drive enormous change in the real estate industry, where climate risks and solutions are too often undervalued, misunderstood, or ignored.

We already know how to build and operate sustainable, resilient homes and buildings. Programs like Leadership in Energy and Environmental Design (LEED) and ENERGY STAR have documented and recognized progress since the 1990s. But three decades later, sustainably certified structures still make up a fraction of the U.S. building stock. Meanwhile, residential and commercial buildings account for 40 percent of U.S. energy consumption and 31 percent of U.S. greenhouse gas emissions, more than transportation, manufacturing, agriculture, or any other sector of the economy. In large urban areas, it’s even more. Buildings account for more than 70 percent of New York City’s emissions.

The risks facing those assets include not just the physical threats of climate change (flooding, wildfires, etc.) but also market risks. A well-sited office building in New York may face limited physical threats, for example, but it will likely see shrinking demand and lower rents if the market views it as an energy guzzler that will struggle to comply with local building performance standards. Likewise, hotel brands or other businesses perceived as not doing their share to address climate issues could see negative investor and consumer reaction. 

Market pressure has already led thousands of companies to release climate-related pledges. A recent survey from KPMG found that 80 percent of the world’s largest companies now have climate goals. But a separate report from a large investor coalition called Climate Action 100 found that only 20 percent of such goals are science-based targets. And another survey from a carbon mitigation consultancy called South Pole found that many companies with goals don’t plan to talk about them publicly. Clearly, there is a better way to measure accountability. 

The SEC, the organization created to ensure investors have reliable information, is proposing to require publicly traded companies to measure and report their emissions annually and disclose material financial risks from climate change. Companies with publicly announced climate goals would be required to outline how they intend to meet their commitments and to report on progress annually. 

This is where the rubber hits the road, and where the new disclosure rules could drive real change in the real estate sector by requiring specificity and standardization in climate accounting. Accurate, detailed and apples-to-apples carbon accounting is critical for success. We can’t allow fuzzy math or vague assurances in the reporting, which is happening too often in today’s corporate ESG movement. 

The good news is that with specificity and standardization, we have solutions to meet this moment. Decades of work in buildings has proven that affordable, scalable strategies and technologies can quickly deliver emissions reductions and resiliency in buildings alongside other benefits such as reduced energy costs, increased comfort, and better indoor air quality. If companies are held accountable for accurately reporting risks, the marketplace and current transformation programs can respond quickly, particularly with a boost from various tax incentives and other funding in the Inflation Reduction Act.

Federal agencies are working through public comments for their proposals, and there are critics. But as we all increasingly witness the costs of failing to address the climate crisis, the administrative burden of reporting this information should be an acceptable tradeoff for empowering the companies that are truly making progress to show it in a way that investors can trust. The smart approach is not to fight this evolution but to redouble efforts to be transparent about risk and seize the market upside that comes from addressing it.

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