Companies May Soon Be Required to Report ESG Efforts

A proposed federal rule would mandate more detailed reporting on climate-related risks of buildings, which could impact real estate in several ways.

A little-known rule could soon take effect that would require disclosures for publicly traded companies when reporting sustainability efforts, which could have a ripple effect on real estate professionals, landlords and more, experts said at a Tuesday session during NAR NXT, The REALTOR® Experience, in Anaheim, Calif. Real estate pros should seize the opportunity now to improve their knowledge about climate risks and sustainability as a point of value and differentiation in their marketplace.

The U.S. Securities and Exchange Commission has proposed a new rule that, if adopted, would require publicly traded companies to provide detailed reporting on their climate-related risks, emissions and net-zero transition plans. “I think this is going to hit our industry hard,” said Craig Foley, chief sustainability officer at LAER Realty Partners in Melrose, Mass. “On top of everything else, we have this lurking in the background, with little awareness about it in the real estate space."

Fears are growing about climate-related risks to properties, including floods, wildfires and hurricanes, and more consumers and investors are factoring those risks into their real estate decisions, Foley says. What’s more, companies are responding to the public’s concerns by committing to environmental, social and governance efforts. As such, the SEC wants greater reporting on ESG efforts in annual reports and company disclosures.

“The proposed rule comes amid growing global momentum toward climate action and standardized disclosure of climate-related risks,” said Cynthia Adams, co-founder and CEO of Pearl Certification, which provides investment data on home performance features.

Many companies may already be doing voluntary ESG reporting, realizing that consumers value it. Adams cited studies that show companies making ESG-related claims have averaged 28% growth over the past five years versus 20% growth for those that have not. But the proposed SEC rule would require more stringent reporting, including company disclosures on issues from material climate impacts such as weather-related, regulatory and market-based risks to greenhouse gas emissions that the company is directly and indirectly involved in. The rule also would require companies to set ESG targets and disclose measures of progress.

Adams said the impact of this proposed rule likely would extend beyond publicly traded companies. For example, if a publicly traded company is a tenant in a building, the property owner would be responsible for supplying additional information to meet the ESG disclosure requirement. Therefore, the rule could indirectly apply to owners, corporate tenants, and real estate lenders and investors—all of whom would be required to make disclosures about their real estate holdings, Adams said.

Further, some companies may choose to relocate based on having to meet new ESG disclosure requirements, Foley said. “The ripple effect in real estate could be that buildings with low carbon footprints will be at a premium as these companies try to meet their goals,” Foley says.

Be Ready With Information

To track such ESG information, companies likely would need to establish a process for data collection and conduct audits to identify knowledge gaps and risks. Foley’s company has already improved its data collection by, for example, requiring home sellers to complete a form identifying their property’s green or high-performance features.

Adams said it’s important to get a sense of the energy-efficient inventory in your market, which can help identify certain buildings that could be retrofitted to become more energy-efficient. Foley recommends checking the “climate vulnerabilities assessment” in your state or county to know which areas in your market are the most vulnerable to climate risks. Then, you can recommend actions to mitigate those risks.

“Real estate companies with climate intelligence and capabilities will stand out,” Foley says. “All of us need to be thinking about this and start preparing.”