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SEC Climate Disclosure Rule: Checklist for REIT Preparation

The proposed SEC Climate Disclosure Rule will require all public companies to disclose their climate-related risks, how they are being managed, and their impact on their business. Through this rule, the SEC is aligning with investor trends of placing more focus on ESG and climate-related risks. Investors today are looking to support climate-positive investments and the SEC Climate-Disclosure Rule offers a major opportunity for REITs to reposition themselves are drivers of solutions on the path to decarbonization.

Key Points for the SEC Climate Disclosure Rule

A major development in the SEC Climate Disclosure Rule will be the changes in regard to climate-related financial disclosure. Prior to the rule, it was up to each organization to identify risk factors that were material for disclosure. Through this rule, the SEC has mandated that for all public companies, climate risk is a material financial risk factor. 

Identifying risks that are relevant to REITs can be broken into four pillars:

Governance

  1. Adjusting outdated internal practices and policies to work with the SEC Climate Disclosure Rule is a primary factor for success. These internal policies need to demonstrate how a company is fortifying its assets against climate risk.
  2. The new rule will create standards around who is responsible for overseeing climate risk on the board and management level
  3. Your organization may have existing ESG elements relevant to the SEC rule that you aren’t taking credit for. Some of these elements may include someone as simple as having a process to inform management about climate-related issues. 

Strategy

  1. The rule will ask for the identification of short-, medium-, and long-term climate-related risks and opportunities for your business. These timelines are typically called out in 2025, 2030, and 2050, respectively.
  2. Companies will need to evaluate their strategy in terms of the changing climate and transition risks presented by a low-carbon economy will be While climate risk for REITs is first thought of at a property level, understanding the indirect climate risks will become more significant in the next few years.
  3. While your organization may already have some SEC-relevant practices in place, an increased granularity may be needed to achieve full alignment. For example, additional details such as breaking down your climate-related risks and opportunities by sector or geography. 

Risk Management

  1. The SEC will request information on which climate risks are most material to your business as well as how they were identified, assessed, and are currently being managed. Looking at property-level actions to take can help mitigate risks tied to natural disasters and energy efficiency
  2. Engaging in feedback with stakeholders such as investors can be helpful in both aligning your business with their needs as well as meeting the SEC’s requirements on climate-related financial risks and opportunities

Metrics & Targets

  1. One of the biggest challenges for companies will be the tracking and reporting of scope 1, 2, and 3 greenhouse gas (GHG) emissions. Scope 1 GHG emissions are those emissions related to the direct operations of the location – for properties this is often what is supplying the HVAC system.  Scope 2 GHG emissions are the emissions produced from the supplied electricity – this varies if from renewable vs. fossil fuel sources.  Scope 3 GHG emissions relate to emissions in the value chain or what is being produced by the company’s vendors.  While scope 3 emissions reporting won’t be required immediately, setting a foundation with strong reporting of scope 1 and 2 can help place your organization ahead of the curve.
  2. Proper data and analytics tools can help your business quantify your climate-related risk factors and communicate them to your stakeholders. Software platforms can enable your company to track GHG emissions of specific buildings and portfolio-wide 

The four pillars of the Task Force on Climate-related Financial Disclosures (TCFD) are interconnected and should not be approached in isolation. Governance provides foundation and informs the development of strategy. Effective risk management is crucial in executing strategy which is then used to achieve the desired metrics and targets through key emissions and ESG metrics. The metrics and targets established in the final pillar are used to monitor and improve the other three pillars, and target setting and trend monitoring is performed against them. When these four pillars are addressed collectively, they operate as a holistic system to support the production of climate-related financial information that is decision-useful, relevant, and reliable.