This is part two of a three part series on the SEC’s new climate disclosure rules and their expected effects on commercial real estate. You can read part one on material risk here.
As of this writing, the SEC has not yet released the finalized rules on the new climate disclosure framework.
And so, REITs and the broader ecosystem of investment partners, service providers and tenants, remain on edge to find out the final result.
It is expected that there will be requirements around auditing carbon emission data, like financial data is audited currently.
But the big question that needs to be answered is whether real estate owners will be expected to report on scope 3 emissions.
That is, emissions from tenant-controlled spaces (as well as embodied carbon, but that’s a topic for another day).
To be clear, the draft rules did state the scope 3 emissions would be required if they make up a material portion of overall company emissions and/or if there is a publicly stated reduction target.
With tenants driving anywhere from 60-90% of emissions in a given asset, it’s safe to say this would be included for real estate.
And that is a problem.
So much so that NAREIT responded on behalf of the industry, stating that scope 3 emissions data are simply not available.
But before we dive into the weeds there, let’s take a step back.
Benchmarking
Way back in 2009, New York City issued Local Law 84, which stated that buildings of a certain size had to submit their whole building energy and water data to the city for comparison.
This process, called benchmarking, is now being used to create the laws like Local Law 97 that are mandating certain levels of efficiency over threat of fines.
And this playbook is repeating itself all over the country, with 7 or the 10 largest real estate markets passing new emissions regulations for buildings in the last five years.
The catch is that, in a market like New York, the local utility, Con Edison, has basically automated the submission process for a nominal fee.
That is not always the case.
The Process Elsewhere
With the rise of ESG, landlords began to get pressure to benchmark their portfolio no matter where their assets are.
The standard process is to gather utility data and input it into Energy Star Portfolio Manager, which takes into account a host of factors to provide a 0-100 score for each property, with every above 75 being eligible for certification.
Doing so manually is time consuming, difficult, and error prone.
And so, technology companies went about creating software that automated this process.
In the end, almost all of them follow a basic format:
This works for achieving a speed and scale that wouldn’t otherwise be possible.
The problem is that, sometimes, the OCR technology in step 3 gets things wrong.
Without an initial audit and verification process, the company will be reporting bad data.
Whereas previously, that had been acceptable. The new SEC rules will mean that there are real consequences for incorrect reporting.
As a result, portfolios are now looking to tools (like Enertiv) that both leverage the scale and speed of software with the accuracy of auditing and verification.
But what about scope 3
Yes, even the most accurate utility bill scraping and reporting software will not help if the data isn’t available.
So, what should be done is the SEC does rule that scope 3 emissions are required?
Some portfolios are pursuing green leases, meaning that tenants are obligated to share data with the landlords.
But these can take a very long time to get implemented, and even then might only provide a patchwork across a portfolio if some tenants flatly refuse (especially those with large footprints and a lot of bargaining power).
The solution then, is shadow metering.
Shadow metering means installing a redundant meter next to the tenant’s utility meter.
The data from the meter flows directly to the landlord, which can then be used directly for benchmarking purposes.
True, this requires more effort than a software solution. However, it also unlocks more value.
Namely, the data is real time, meaning that analytics can be run to identify optimizations.
This means that landlords can then offer tenants a value add service, helping them reduce operating expenses at a time when they are rising faster than ever before.
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