On-Demand | Preparing Your REIT for the Upcoming SEC Climate Disclosure Rule

There's a lot to discuss in this area, and we're going to focus on what the proposed SEC climate-related disclosures mean for you, your REIT, your firm, and help you with steps that you can take now to prepare and how to best tackle those requirements. So we're in for a great session because if anyone knows the ins and outs of these reporting requirements, it's today's panel. From EisnerAmper's ESG and sustainability team, please join me in welcoming Lourenco Miranda, Danielle Barrs, and Charles Waring. So to start off today's session, we're going to get a little bit of a background and overview of the SEC recommendations and the Task Force on Climate-related Financial Disclosures recommendations and how they can be applied to your firm and to your REIT. So I'm going to hand it off to Lourenco and we're going to learn more about the recommendations and the task force.

Lourenco Miranda: Thank you so much, Lisa. Thank you everyone. So I've been working in risk management for about 20 years or even more than that. And what the SEC is asking companies to do and to disclose is their risk management practices related to climate-related risks. So what the SEC is asking the companies to do is nothing more than incorporate climate-related risks into their already existing risk management practices and decision making process. So the first thing that you have to do as a company, and if you started from scratch or if you're already advanced, the first thing you need to do is to identify the gaps. It's a readiness assessment. If you think about the compliance strategy as a project within your company, it is a complex project, yes. You have to incorporate different elements from different units. You have to involve the CFO, maybe the CFO will lead the pack in your company, and you have to involve, of course, the controller, you have to involve the business, you have to involve the people in procurement, somebody in the COO office that understands and knows and how to manage, and they identify the carbon emissions, the electricity bills.

So it's a very complex project. So if you think of that as a project, and because companies already been in the business of managing risks and surviving in difficult times and projecting sensible and responsible and reliable cash flows, they are already managing their risks. So you have to first conduct this readiness assessment. Also look inside your risk management practice and your business and see how much you can leverage out of it because there's a lot you can leverage as well. So everything comes out of this readiness assessment, which is the first phase of this compliance strategy and then this project that you have to install in your company.

So you have to have a project manager, you have to have somebody that will coordinate different units, and it is a risk management process. Because it's a risk management process, any risk management process starts with governance. You have to establish the policies, the procedures, and how to implement those. You have to set the tone at the top, and the tone at the top comes from the board and senior management. So you have to make sure that your board understands their roles and responsibilities towards incorporating climate-related risks into their strategies, into their decision making process. So it's something new for them and that's why you need to train them. You need to educate the board. They need to understand why climate-related risk will impact their business. And here we are talking about treats or talking about real stakes.

The boards, they have to understand how climate-related risks will impact their business, will impact buildings, will impact the ability of your tenants to pay you back, and to keep those tenants, and to have a solid and replicable cash flow. So that's what the SEC is asking you to start with, starting with the board and setting the tone at the top. And of course your senior management has to be aware as well. So you have to talk to your senior managers. They have to be aware of what climate-related risk means for day-to-day business because they have to execute the strategy that the board is setting. So at their level, at the C-suite level, they have to understand how they incorporate all these strategies and execute those on their day-to-day basis. So that's another thing that the SEC is asking, that senior managers understand and incorporate that in their policies and mandates.

So that's the first part of phase two. So after you did the readiness assessment, you concluded that in phase one and you have a nice action plan with resource allocation, establishing this clear pathway towards compliance of disclosures, towards compliance with the SEC. The second thing is during phase, this going to phase two, the first thing is establish the board and educate them and set up the roles and responsibilities at board level. The second stage in phase two, which is the after you set up the board, they understand the roles and responsibilities, you understand the policies and mandates that the senior managers have to implement; you have to assess the financial impact. And people talk about this materiality assessment.

What is materiality assessment? So the first thing that you understand is, okay, what is your business? What is your strategy? How do you see your business going and growing in the next 3, 5, 10, 15 years? There's one thing that you have to bear in mind that we are talking about climate-related risks. And not necessarily climate-related risks they realize or materialize in the short term. Some can, some you're already experiencing those in all these extreme weather events that we are experiencing now, that we'll see all these events that we currently see in the country and elsewhere that are impacting real estate dramatically. So we understand that this is happening already right now, but one thing that the SEC is asking the companies as well is to understand how the climate-related risk will impact their financial sanity or financial health in the future, in the middle and the long term.

So then you have to assess how much you could lose if a severe weather or severe flood damages your building. So what is the value that is at risk for your real estate and how does that impact in your cash flows? So tenants will stop their contracts and then move somewhere else. You're going to stop getting their payments and stop getting this supposedly reliable cash flow. So how much that will cost you, how much that'll impact your cash flows or cost of capital if you want to get your business financed or you going to have to, or any other financier, how much that will cost. The banks will ask you to understand this and assess this materiality. And materiality is how much that will cost. And if it's something that is relevant enough for you to report to your shareholders, to your stakeholders in general, then it's something that you have to report. So that's where materiality can become a very challenging task but necessary in this moment.

Then you go to risk management after you understand the risks and of course the mitigants. In risk management, you understand internal controls and you understand how you can mitigate. What are the opportunities to reduce the impact or the likelihood of that event happening? So if you can have, Danielle was going to talk about more how to mitigate physical risks and the transition risks which are part of climate-related risks in the future in a few moments. But the thing that you have to understand is how that will impact your cash flows, how that will impact your financial health in the short term, in the middle term, and the long term. And that's the risk management part. When you start documenting, you start making sure that all the processes are in place. The internal controls are in place, including policies. The tools, it's important that you have a supporting tool and reporting structures that are in place for you to execute, not only once, but also in a continuous basis.

And one thing that the SEC is asking companies to do as well is to understand the resilience of the business in the medium and long term. Again, as I said, climate-related risks are long term related as well. So most of the climate-related risks that will only materialize in 10 years from now, 20 years from now. So they ask you to come up with different scenarios, climate scenarios, and also scenarios that will impact your business in the medium term and the long term. Finally, to conclude phase two, you have to identify the primary sources of climate-related data. So then the one that SEC is asking and Lisa already mentioned is the greenhouse gas emissions. How you report and how you identify what Scope 1, Scope 2, and Scope 3 are. So what this is about, what kind of framework you're going to use, and how you're going to report this public.

And one thing that the SEC, it's important that it's also mentioned, that all these metrics and targets that the company is creating, they must be linked to the risks and opportunities that you identify during the strategy and risk management process to do with the phases, strategy and risk management phases. Therefore, what my message here is it is a process. It is a process that has a link between governance, of course you set the governance, then you have your strategy, understand how risks and opportunities impact your strategy and your financial in the medium and long term. How you document the risk management practices and policies, reporting structures, and in the end how you link those metrics, greenhouse gas emissions to the risk that you identified in the first place.

The phase three, of course, after you have all this implemented, it's a natural conclusion that you report this and disclose and integrate that in your 10-K. But that's the final part of your compliance strategy. Now that you've done everything so far, you are able to report this and integrate that into your 10-K. In a summary, there in a footnote in your 10-K. Now that's basically what the SEC is asking. As I started saying, it is a huge undertaking and if you don't start now, it's going to take a while for you to implement this. It can take at least two years to implement something like this. So my message here is start as soon as possible, create your gap assessment, identify this action plan and allocate resources, and start identifying the climate-related risks that your business is facing.

I'm going to skip this one. And again, the message here, the final message that I want to convey, is companies can only disclose what they practice. So you cannot disclose only GHG emissions. Disclosing just greenhouse gas emissions is not enough. So the question is why you are reporting GHG emissions. You have to understand the governance, how you incorporate climate-related risks into your day-to-day activities, how you incorporate climate-related risks in your strategies, how you execute those through your risk management practices, how you understand and the resiliency of your business in the short, medium, and long terms, doing all the scenario analysis that the SEC is requiring. Then you are able to disclose. That's the message here.

So the first, you incorporate climate-related risks matter in the corporate governance, starting at the board level, scaling down to the C-suite, executing this plan towards implementing the risk management function into your day-to-day activities. How you identify risks, how you identify opportunities to mitigate those risks, and how you incorporate those into your financial statements, how you understand the impact of those risks in your cash flows, in your cost of capital, et cetera. And then you create these metrics, link these metrics to the risks, and then you are able to report. Again, the message here is it is a risk management process and there is a link between all these elements that we've just discussed. Lisa, back to you.

Lisa Knee: Great. So actually, I hate to put you on the spot, we do have a question. I think we were going to do questions and answers at the end, but I think this is really relevant to ask here, so thank you for asking them. How do you quantitatively define materiality and did the SEC define specific thresholds and a time horizon to quantify material risks?

Lourenco Miranda: Yeah, so that's a good question. Thank you, Lucio. So how do you quantify materiality? So the first thing is in risk management, there are two elements that you have to identify when you're talking about measuring and assessing risks. First one is what is the chance, what is the likelihood of that risk happening? And if that risk happens, what is the impact? Usually we believe, and then we hope, that physical risks like natural catastrophes or natural events will happen less frequent. So the frequencies is low, but when it happens, the impact could be high. So if there's effect it would be high. If there's a hurricane or there's a thing that is even more severe that could destroy your building, that could jeopardize the structure of your building, then the impacts in your financials, you are going to lose more. The value at risk of your real estate will be impacted.

So now you have to understand how much that real estate is valued so that you calculate the value at risk, and the likelihood of having one of these larger events. You can get information from the NOAA, so the National Oceanic and Air Agency. So they have weather maps that you can use in order to identify the most risky regions in the country. So if you're talking about flood or talking about sea levels, we can talk about Florida. Maybe Florida will be at risk for flood or hurricanes. You have to understand the hurricane maps. If you're talking about other types of climate-related risks, you have to understand where the chance of the likelihood of those happening reside in the country. If it's a transition risk, it will be related to states or even counties or municipalities and how the legislation can change. So you have to understand that as well.

But that's where the likelihood is measured. The second one is of course the value that you have at risk. So the expected loss there is when you multiply those two when you have a quantitative expected impact in your balance sheet or your income statement or cash flows, then it's the quantification part. The second part is did the SEC define in specific thresholds and time horizon to quantify material risks? They did, we don't know the final rule yet. They had this 1% of threshold or if it's more than 1% impact in your financials, regardless if it's in the financial income or the cash flows, then you have to report them and you have to report at each level or each different types of impact if it's more than 1% change. There are some indications that this will be dropped and we don't know yet is if there's going to be a replacement for this 1% or if nothing will be replacing this 1%.

But if you go to definitions of materiality and the thresholds, what the Supreme Court says is that if you believe that this number is material enough that if you do not disclose it it could impact the shareholder decision, then it's material. But that's the Supreme Court definition. We can use that as well. And time horizon to quantify material risks. Again, the time horizons, the SEC expects the companies to come up with their own horizons or they would expect you to at least tell what short means, medium means, and long term means. So they have these three instances and that's different for each type of business.

Lisa Knee:Terrific. Thank you again, and thanks for the questions, keep them coming. So when we're reading about ESG, and I think E starts first, and so our environmental specialist, Danielle Barrs, to talk about the key environmental issues that are faced by firms and REITs. And I think that's a really good leeway in for the conversation that we just had for Danielle to explain to us how REITs and your firms can mitigate and adapt to climate change and some of the best practices. So Danielle, take it away.

Danielle Barrs:Hi, thanks so much, Lisa. So my name is Danielle Barrs. I am the Director of ESG and Sustainability here at EisnerAmper. I did my master's of environmental management at Duke University way back when and have spent the past decade or so in corporate sustainability, focusing mainly on sustainable business, sustainability strategy, energy management, and lifecycle assessment. So I will be giving everyone a little bit of a lay of the land to begin with, starting with some sustainability trends that are going to be very relevant for real estate specifically. So let's start with the big statistic that we all know, Lisa mentioned it as well, which is the estimate that the United Nations has put out that real estate accounts for 40% of the world's energy consumption, and that is part of emitting approximately one-third of greenhouse gas emissions. So what does that tell us? It tells us that real estate might have a high carbon footprint, but it also offers the greatest potential for curbing greenhouse gas emissions.

Of that 40% of the world's energy consumption from real estate, the estimates are that 70% of that comes from operations of the building and 30% from construction. So how do we address these? We address operations with things like energy efficiency and we address construction with things like reducing embodied carbon, looking at different sourcing materials for construction, looking at waste management, things like that.

Some industry statistics to show you that you are not alone. According to a recent Nareit report, a whopping 100% of the largest REITs by equity market cap are publicly reporting their ESG efforts, and then approximately 80% of those report on carbon. So this is a big deal. These are voluntary reports. Now as it relates to the SEC, anything that REITs disclose on greenhouse gas emissions will of course, under this proposed climate rule, need to be integrated in financial statements accordingly. So when we talk about sustainability trends, because of this, for this webinar and when we talk about the SEC's climate rule in general, these are some of the reasons why we focus on reducing emissions, why we look at climate-related portfolio risks for all industries, but especially in real estate and for REITs for these reasons. In addition to these trends, when we talk about clean energy, energy efficiency, we also talk about how to finance clean energy and energy efficiency projects.

A little bit more on the SEC and how these trends relate, although if you've been following the rule, currently under contention. But for those companies that will need to report Scope 3, this includes things like embodied carbon. So definitely want to take that into consideration and working with your suppliers to source low carbon materials, to reduce construction waste, we start talking about circular economy a little bit. When it comes to things like new builds, we look at things like tax credits or ENERGY STAR certified buildings. So ENERGY STAR appliances are the more energy efficient appliances that can be incorporated in new builds or retrofitted after the fact. But a lot of the time it's easier for new builds and then you can get certified as well. And then that tax credit, that certification has actually been extended for homes and units acquired after January 1st of this year, so that's good news.

Other things like integrating solar panels from the get-go, new builds, yes, or after development. For new builds, integrating solar panels potentially where PPAs, which are power purchase agreements, are not necessarily readily available or they're located in regulated markets. Things like PropTech, huge sustainability trend, as it relates to energy efficiency and reducing consumption, especially. Looking at things like smart sensors, smart lighting, real time energy monitoring, sub monitoring for all these things, and then looking at software to kind of monitor and measure that data is going to become really important as well. So now that we've got the trends out a little bit, let's dive into the SEC's rules specifically. I'm going to talk a little bit about some of the more industry agnostic categories, and then I will also dive into some more root specific examples. I'll call some of those out from the proposed rule.

So under the current proposed rule, companies need to disclose Scope 1 emissions, which are direct emissions, Scope 2, indirect emissions, as well as potentially Scope 3, which is indirect, upstream and downstream, if material. So that's key, if material. Or if the company has a set decarbonization goal that includes Scope 3 for the most recent fiscal year, that would also be a reason why a company would have to include that. But to be determined, we will see how the Scope 3 kind of plays out. So let's start with some industry agnostic, more high level provisions from the SEC. We keep talking about greenhouse gas emissions and carbon, and the SEC highly focuses on that rule. And just to make the link when we talk about the TCFD, which is the Task Force for Climate-Related Financial Disclosures. So when we talk about things like governance, strategy, risk management, metrics and targets, that is the framework that the SEC is using. So that's why we keep referring to that framework.

So when we look at greenhouse gas emissions, we are usually looking at either/or, preferably and, absolute and intensity-based emissions. So what does that mean? Absolute, just total emissions expressed in CO2e, which is carbon dioxide equivalent. Or intensity-based, so an example of intensity-based would be volume of emissions per unit of revenue. So reducing emissions intensity means that less pollution is being created per unit of revenue. So that's going to become a really important kind of industry agnostic way of expressing carbon and CO2e.

I want to discuss briefly some Scope 3 categories because right now it may or may not be on the chopping block, but we're we're going to assume that it's going to get kept in there. So some Scope 3 categories that are most applicable to REITs; for hotels, for example, purchase goods and services, employee commuting, and waste from operations tend to be the most applicable Scope 3 categories. Nareit has some amazing information on this and specifically what Scope 3 categories are material. So we talked a lot about materiality. For example, industrial purchase goods and services, still an important one, fuel and energy related activities, and then downstream leased assets are also going to be very applicable for REITs with the Scope 3 categories.

Now let's get back to Scope 1 and 2. So greenhouse gas emissions, greenhouse gas metrics and targets, especially, get a lot of attention. But keep in mind that in the climate reporting space, these metrics and targets for carbon and greenhouse gas emissions are really the tip of the iceberg. So I want us to consider some of the things from an investor standpoint that GHG emissions do not tell you. This is kind of going to transition into some climate-related risks. Those are going to be really important. So it's not just about greenhouse gas emissions, but we also want to look at some of the bigger issues like risks and opportunities.

So some of the things that greenhouse gas emissions cannot tell you will include how your company is identifying and managing these climate risks that we'll talk about. Which of these climate risks, again, are most material to your business. Talking a lot about who is responsible for overseeing climate risk. So you're talking about governance here, which we talked about a little bit, both at the board and management level. Things like how your business strategy takes into account changing climate, global decarbonization, and some of the transition risks, they're policy and regulatory related, that are posed by this global transition to a low carbon economy that we're all talking about. And then things like how credible your path is to get to net-zero. So credibility. So when we look at either absolute or intensity-based emissions as a number or an intensity, these are just some of the things where you really can't see when you just get those numbers.

So this is why we also talk about risks and opportunity. And so those are divided into transition and physical risks. So to go into those a little bit, transition risks, again, are really just related to policy and regulations for the most part. For example, we know that the post-pandemic return of corporate and leisure travel demand has affected the hospitality industry. So risks there might be not having enough staff to support operations or to develop or open new hotels. Things like that are all related to transition risks. Industry agnostic for sure, but if you got a building, if you got some sort of real estate, whether REIT or non-REIT, these are still things that you're going to need to look at. Transition risks in general are going to be really important.

And then physical risks are the ones related to extreme weather events, flooding, drought, things like that. When we talk about physical risks, we're really looking at things like property damage related to these extreme weather events. Increased maintenance costs, suspended operations, retrofit costs to reduce energy consumption, and then subsequently carbon emissions is another big one. Why? Because the more energy reduction you want to achieve, also the likely the higher the marginal cost. These are some things to consider when we're looking at physical risks. And of course we don't only want to look at risks, we also want to look at the climate-related opportunities, also very important.

We can look at opportunities within science-based targets. So developing net-zero goals, leveraging technology, the CRREM tool is a great example. So that's the Carbon Risk Real Estate Monitor tool. There's a bunch of other ones. Coastal Risk has a risk footprint tool for calculating emissions. We can use eGRID, the greenhouse gas protocol, things like that. These are all things to calculate emissions, analyze GHG intensity, we can analyze it on a per square meter basis now. Some of these risk footprint tools can help companies uncover property specific natural hazard risks, which is going to be really helpful for all of these physical climate-related risks. Some other things are waste management, fugitive emissions from refrigerant leaks, things like that, but that's getting a little specific but still industry agnostic.

Now when we focus on REITs, I wanted to call out just a few specific provisions within the SEC's proposed rule that are going to be of interest to REITs, specifically. So one of those things is going to be the requirement to disclose the share of assets concentrated in areas exposed to physical risks. And so that is going to be as either a book value or as a percentage. Another one is disclosing zip code or geographic location for all properties exposed to material climate risks. Again, materiality is going to come into play here. Do that materiality assessment and then look at the geographic location for all of those material climate risks. And then another one that I wanted to call out was reporting financial impacts of climate-related risks. This is if aggregated impacts exceed 1% of the total line item. That's getting a little specific, provision is.

So those are all some things that are going to be really REIT specific. Just a few other things when it comes to indirect financing for REITs. Note that investors and banks will account for emissions associated with fuel combustion and the use of purchased electricity in Scope 3. So we're still going to talk about Scope 3 a little just in case it stays in there. And PCAF, which is the Partnership for Carbon Accounting Financials, is a great resource if you want to learn a little bit more about that. So now you're going to get into a little bit more of a financial aspect, I believe.

Lisa Knee:Well, we wouldn't be an accounting firm if we didn't have the auditor's perspective on here on how auditors can help ensure accuracy and reliability of these disclosures and what challenges you might face in reporting these disclosures. So going to introduce you to Charles Waring, thank you Charles for helping point out our auditor's challenges.

Charles Waring: Thank you Lisa, and good afternoon and good morning everyone. As Lisa mentioned, I'm an Assurance Partner here at EisnerAmper and my focus within our ESG services is really related to the reporting and the reporting readiness piece. So I know that Lourenco and Danielle have talked about a lot of the fun aspects as far as what's the content and what needs to be considered here. I'll talk about what I think is a different aspect of the fun here with this proposed rule, but what the auditor's going to look for. So just a few things I wanted to share today, but I think that they are worthwhile because it's what we've been seeing within the market here, and I think that this is definitely something that is a pretty strong lift for any company here. So first, just to remind, I mean this is a new area.

The first time will be bumpy and you'll likely get a few bruises here. So just like with any new area that that's going to be the case here. But I will tell you that, and many of the sustainability professionals that I've had the opportunity to meet, very few got into this field to really do SEC filings and SEC compliance here. So there has to be an aspect of education, training. This is really the first time through this process and I think that it can't go without saying the need for holding hands and working through the process, there.

The next piece is the need to really establish and formalize internal controls, just like you would have with any other financially significant process. This also requires that same level of rigor. So really developing that across all of these areas that Lourenco and Danielle have mentioned. The basic areas are the metrics and reportings and the targets, but also so with the formalized governance. The reporting to those in charge of governance, senior management, having those formal processes in place, leveraging standardized reports that go up and having those aspects that are fully documented. So that needs to be established across the relevant processes here that support the ultimate disclosures. The other aspect that we always want to remind as an auditor's friend, the concept of documentation. There is a need to capture what is being performed so that it can be reperformed, whether it's during that year or, I always tell clients factor in at least a year away from when it was performed so when an auditor can come in and look to review it, reperform it, make sure that they obtained and reached the same conclusions.

And that's another component is that maintaining it. One of the things that we've seen a lot of is that when we're working through these processes, the clients might have the information available, and they pull it up or they have to recreate it for us, but it really needs to be when you're executing your controls, you're documenting it, you're maintaining it, and maintaining it in a steady state there without having to pull it back up or pull up that query or whatever it might be. But it needs to be really maintained and memorialized there. That can't be stressed enough.

The next piece here is there's a system component here. Just like you would have with your general ledger, with your ERP, there's an aspect of having controls around the system. So the most basic component, we can't have the system having full open access to everyone within the organization. Not every single person's responsibilities are the same and correspondingly, the systems most likely have the ability to restrict access to those areas that's needed. But then there's also aspects of what are the inputs and outputs of those systems? So some of the times it's manual inputs, manual outputs, sometimes it's being fed from one system to another, the automation there. Just like you'd have in your financial systems, your supporting source systems, or whatever might be. There needs to be an aspect of capturing what is being put into the system and then the output there.

That needs to be in a well-defined controlled manner that existed throughout the period. I think that one of the things that we are seeing is that this is a critical component here. I think that many companies are not realizing the needs as far as both the volume of data and types of transactions and support that would roll up into your Scope 1 and 2 emissions, putting Scope 3 aside. But what is involved to be obtained, maintained, estimated, there's a component that there's some estimation in there, and that is really heavily reliant upon the source systems that go along with that. The last piece of some of the key things that we're seeing here is the aggregation. When we're talking about REITs and real estate and properties, each one of the properties is a unique location there. That poses a challenge from a standpoint of, especially depending on how your property is set up, if you've got either multi-tenants in there, different meters that go along with it versus one or a more limited number.

Ultimately, each one of that is a transaction initiation point and all of that needs to be captured and aggregated up throughout the entire process. So some of the times we'll see companies with a process, with a system to centralize that. But what we're really starting to see is that that's not necessarily the case sometimes, especially if an entity has purchased a portfolio of properties in one geographic area that might have been inherited or purchased from a different entity. They might not be all on the same systems or we've purposely chosen not necessarily to integrate them onto our overall system. And so that starts to create pockets of a disparity there. That information still needs to be obtained, it still needs to be analyzed, maintained, and ultimately reported upon. What we also are seeing is if you're acquiring properties or disposing of properties, those need to be accurately reflected on that aggregation there.

That's something that, it sounds simplistic, especially from when we're talking to accounting and finance professionals, but from a standpoint of making sure that all that operational data is flowing through appropriately, can be a challenge. Now, I think that the challenges, some of these things have been mentioned by Lourenco and Danielle, but it's worth stressing. Again, this is a lengthy process to prepare. If you have not done any voluntary ESG or CSR reporting, really you need to factor in at least a year to go through this whole process. Now, if you have an established process in place or established reporting, then it's probably going to be less, but I would at least factor in a nine-month period. Because again, this is something that is going to be a process and the first time through is likely to have those bumps and bruises. If you're waiting until that last possible point, sometimes if it comes to your external auditors, if those exist at that point, then that can likely have an impact on your reporting. So it benefits you to work out all those kinks before it's required and going into your 10-K.

I think that the other component here is knowing the nature and location of your properties. So some of them are more sophisticated, some of them are less sophisticated. If you have geographically dispersed properties, then what we've seen is that creates a challenge as well. And just as I've mentioned from the systemic support here, what we've seen specifically in the hospitality space, those locations, those property types tend to still be just a little bit more manual paper based in their processes and less on those centralized systems that would aggregate financial information, let alone emissions and energy usage and utility information.

The other thing I want to call out, so unique to the REIT space, with the GRESB reports. If you haven't obtained and read your GRESB report, I would definitely encourage you to reach out and obtain that and take a run through that, because although there is overlap in the SEC's requirement, it is not a one for one. So there is things that you can glean from that. But I will tell you that I've had one client where they had their GRESB report, but then they also had a third party review that information under ISO standards. And when we came in after that, kind of using it from our lens, the work, the approach that we look for and to the level that we would expect in a process that would roll up into a financial report, we found a lot of holes in that.

So I would just say that I think that for the ISO standards, I've also encountered the AA1000 standards, they tend to be a little bit more of the inquiry and just looking at one example. Whereas what we're going to look for, what an auditor's going to look for, is they're going to go to that reperformance standard and look for established processes in internal control. So if you've got your GRESB report there's likely some good data elements in there, but I wouldn't necessarily say just rest on those laurels alone. The last piece on this slide I'll mention is just with any sort of modeling or assumptions scenario analysis, those assumptions really need to be fully documented and baked in, because again, that's some of the things that an auditor's going to look for to understand how thatis being addressed there. So those are my things that I'm talking through with clients and it's a challenge, but I think that with proper planning and consideration, it's something that that's our clients are working through.

Lisa Knee: So that's great from an auditor's perspective, really appreciate that. We've had some terrific questions come in before we do our one-minute takeaways so that people can walk away understanding what they need to do. Danielle, I believe this one is for you, of the 80% of the REIT companies that were reporting on carbon emissions, what percentage are accounting for Scope 3 emissions?

Danielle Barrs: Yeah, great question. So I'm guessing that is in reference to these statistics that 100% of the largest REIT were publicly reporting ESG efforts, and then around 80% were reporting on carbon emissions. That was from a 2022 Nareit report, so that would've been 2021 data. For that year, it would've been around 40% that reported on Scope 3, so less than half. Which considering these are voluntary reporting statistics, it could be worse. It could be better, but it could be worse. Less than half.

Lisa Knee: Great. And the next question I think, Lourenco, this one is for you. I assume all the estimates of financial impacts are net of the mitigation of property casualty insurance.

Lourenco Miranda:So we don't know the final rule yet, so that's a big question. The rule mentions a lot in terms of how much the insurance companies are moving towards the climate-related risks, underwriting these risks. Everything is about your arguments and then how you make the case so that the final impact will be net off insurance. And of course you have to understand how likely the insurance company will pay the claimant how much. So that's an excellent question. Something that we need to see the final rule, how they will establish that finally. But it is true that you can use insurance as part of the mitigant of an event. That's something that has been happening even in the past. But we'd like to wait and see what the final rule will stipulate in terms of how much that will be acceptable, if it's 100% of the policy or what is the percentage there. But yeah, so insurance should be a key layer in the financial impact.

Lisa Knee:Great. And Charles, you've left yourself open for this, but this seems like a lot of reporting to take on. What is the risk if you don't start preparing for this disclosure, and how necessary is it?

Charles Waring: Well, I'd say that if you leave it to the last second, you're likely going to be encountering those bruises and bumps, and you're not going to be in a position to clean those up. And to be determined on how your external auditor will interpret it, but I just kind of do my normal auditor caveat and say, you're at least looking at some sort of deficiency. But obviously it's probably going to be on the higher end of that, but you just don't want to open yourselves up for that.

Lisa Knee:  Great. And so thank you to our panelists and our ESG team here at EisnerAmper, I should give a little plug for that, but I would love for each of you, maybe you should give us one key takeaway and then we'll send around some takeaways as a result of the webinar. But if you could each just give one key takeaway from your segment so that people can focus on that to make sure that there is something when they're leaving a session like this, what they really need to focus on. And Charles, let's start with you and we'll go the reverse.

Charles Waring: Sure. So I'd say make sure you're involving all various departments within your organization, accounting, operations, IT, and sustainability. They all need to be at the table from the beginning to understand the expectations and deliver a final product.

Lisa Knee:Terrific. Danielle, one takeaway.

Danielle Barrs:   Just one? Okay. For my segment, I can talk about this all day, the biggest takeaway that I want to draw people's attention to is going back to, although the SEC does really focus on greenhouse gas emissions and folks are talking about that, especially Scope 1 and 2, number one, do note that Scope 3 is still on the table. But also as it relates to greenhouse gas metrics and targets in general, they're getting a lot of attention, but again, it's just the tip of the iceberg and they don't tell you the whole story. So from an investor standpoint, remember some of the things that those emissions do not tell you are things like how you're managing climate risks, how the board and management level is overseeing those risks. So definitely take note of those aspects as well.

Lisa Knee: Great. And Lourenco.

Lourenco Miranda:The message is this is a process. It's a long process, starts from governance until reporting. If you don't start now or if you hadn't start yet, I urge you to start because it's not only good for your compliance with the SEC, but it's also good for your firm. It's something that is a competitive advantage in the market, so it's going to be a market driven requirement. So urge that you start as soon as possible. It is a complex program. Treat it as a project. So it's a very complex one with multiple parties, as Charles mentioned. Yeah, so start with your assessment, understand how far you are, and leverage what you have already implemented.

Lisa Knee:Terrific. And I think as a final takeaway, we do have a checklist that we're going to be sending around to everybody on the webinar. And so in that checklist, it's going to give you some key action items to make sure that you are ready and prepared for what the SEC is to hand out to us. So with that, I thank all of you for participating and thank you for your great questions in today's webinar. Thank you to our team, and I'm going to hand over to Astrid for closing remarks.

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