Vistra Insights

Tracking real estate carbon emissions

As investors, regulators and the public clamour for corporate sustainability commitments, their focus is increasingly turning to real estate.

The built environment generates 47 percent of the world’s annual carbon dioxide emissions, according to a study by Architecture 2030. While some of that is from the construction process and fabrication of building materials, the lion’s share — roughly 70 percent — comes from building operations. That’s something building owners and managers can control.

To demonstrate to customers and investors that they’re making progress, many businesses are tracking the details of their carbon emissions. While some jurisdictions have emissions reporting requirements, most reporting is still voluntary and there is no single set of rules or guidelines.

Keeping abreast of evolving rules and guidance is critical for organisations to maintain compliance in a rapidly evolving regulatory area. Tracking emissions and demonstrating emissions reductions can also help businesses protect their reputations, reduce energy costs and increase valuations.

Private equity and real estate fund managers are also increasingly interested in real estate emissions reporting. Accurate data in this area can be used to meet demands from investors and regulators and enhance portfolio value.

This article provides an overview of current guidance and some examples of emerging emissions regulations.

Emissions reporting guidance from non-profits

The advent of measuring carbon emissions dates to the 1950s, while widespread calls for emissions accountability began in the 1990s and continue to this day. In 2021, the COP26 conference convened more than 120 world leaders to address the climate crisis. As of October 2022, there were 195 signatories of The Paris Agreement, an international treaty to combat global warming that was introduced in 2015. And according to the United Nations, more than 70 countries and 1,200 companies have set net-zero targets.

Although there is not yet a single set of emissions reporting standards, several organisations offer resources and guidance. Prominent examples include:

  • The Greenhouse Gas Protocol (GHG) provides standards, guidance, tools and training for businesses and governments to measure and manage emissions. Its Corporate Accounting and Reporting Standard is widely used by corporations, NGOs, universities and government agencies.
  • The GRESB Foundation provides a Benchmark Report, equipped with a template including tables, charts and graphs designed to help real estate funds, real estate investment trusts (REITs), property companies, real estate developers, infrastructure fund managers and asset managers to assess ESG performance. Sample reports are available on the organisation’s website.
  • The United Nations has developed a set of Principles for Responsible Investment (PRI), including some related to real estate. It offers resources and tools, ranging from introductory materials and case studies to technical and policy guides.

As governments worldwide develop emissions reporting rules, many are using these non-profit frameworks as a starting point.

EU rules: CSRD and SFDR

Organisations in Europe have two sets of rules to follow. The first is the corporate sustainability reporting directive (CSRD), which has reporting requirements for all large companies, including non-European organisations with a subsidiary or branch in the EU that nets at least €150 million per year.

The European Commission proposed the CSRD in 2021 to include more detailed reporting requirements than originally outlined in the Non-Financial Reporting Directive (NFRD), which the CSRD extends and replaces.

Under the CSRD, companies must set ESG targets and annually publish their progress. They will also be required to judge the impact of both their own operations and those of their suppliers. Companies that aren’t already required to submit reports are expected to be phased into the program starting in January 2024.

Companies with ESG initiatives must also adhere to the Sustainable Finance Disclosure Regulation (SFDR), adopted by the European Commission in 2019. Though the regulation is aimed at EU alternative investment funds, some of its rules also affect managers outside the EU who provide portfolio management, risk management or non-discretionary investment advice to the funds. Though the regulation came into effect in 2021, its technical framework was finalised more than a year later and goes into effect in January 2023.

The environmental portion of the SFDR requires organisations to show how they meet sustainable investment objectives and explain how they align with the EU Taxonomy Regulation, including a statement detailing how they incorporate Principal Adverse Impact (PAI) factors, including carbon emissions, into investment decisions. The scope of financial products that PAI applies to isn’t clear. For organisations, it’s best to err on the side of caution and provide as much detailed reporting as possible.

Forthcoming SEC regulations in the US

The US Securities and Exchange Commission has proposed new rules for climate disclosures. If the rules are adopted by the end of 2022, they will be phased in, starting with large companies, in 2023.

The rules require companies to track and report on greenhouse gas emissions in three categories.

  • Scope 1 covers a company’s emissions from its operations.
  • Scope 2 covers emissions that arise from internal energy consumption and vehicle use.
  • Scope 3 requires companies to track emissions generated by their suppliers and customers.

Many businesses are at a loss as to how they will obtain the data needed to comply with the detailed reports. Multinationals often own or lease buildings in separate jurisdictions. They may not receive energy information from all of them, especially from older buildings that lack smart sensors to track usage. In buildings that do track data, managers use differing metrics.

Scope 3, which covers emissions outside a company’s direct control, is the greatest source of uncertainty and confusion. The SEC has said it will provide flexibility on Scope 3 reporting, including exemption from liability if estimates are provided in good faith.

Many companies do not currently have systems in place to track supplier and customer emissions, which can be a huge factor in overall results. At Microsoft, for example, Scope 3 gases made up 97 percent of the company’s total carbon footprint for its fiscal year ending in June 2020.

Companies that do collect external emissions information say the data is often incomplete or inconsistent. They may not receive data about how customers use their products. And some suppliers may not measure emissions. Few partners are likely to calculate or share commuting data for their employees. Scope 3 rules allow companies that don’t have updated information from suppliers and partners to substitute industry norms, at least for the present — a point of contention for critics who say it could let some companies off the hook for their own unsustainable practices.

If adopted, the SEC rules are likely to be challenged in court. But unless they are swiftly overturned, compliance could begin in 2023. A plethora of data is required, and companies that haven’t done so should start setting up systems to collect it now.

Energy tracking and conservation tools

Business owners have an arsenal of physical tools to help them reduce real estate emissions, including sustainable construction techniques and retrofits to HVAC and lighting systems. Some measures, such as smart lighting, are relatively simple and inexpensive to implement.

Apart from helping companies achieve compliance, tracking and controlling energy use will help reduce utility bills. In an environment of inflation and global economic uncertainty, that could be a benefit worth pursuing, regardless of how laws evolve.

On the reporting side, software companies — whose bread and butter is enterprise tracking, analytics and reporting — are rapidly developing platforms to help companies comply with SEC and other environmental rules and guidelines. Some are creating innovative tools, including predictive AI algorithms that make sustainability recommendations based on changing patterns of energy use.

These platforms will be particularly useful for large multinational organisations and for private equity and real estate firms tracking portfolio companies. There’s little doubt that in the foreseeable future, keeping compliant with new and evolving emissions reporting requirements in multiple jurisdictions will become more complicated and investor demands for real estate emissions data will grow.

David Spetter, managing director of Sedico, a Vistra company, contributed to this article.

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