Further, the regulatory environment is challenging real estate companies to provide greater transparency into their sustainability practices. In March 2022, the US Securities and Exchange Commission (SEC) reinforced this priority when it released a draft climate-related disclosure proposal. Among other things, the proposal would require domestic and foreign SEC registrants to disclose qualitative information about climate-related risks and various quantitative metrics, including GHG emissions. The SEC disclosure proposal would require Scope 1 and 2 emissions, those directly produced by the registrant, to be reported. Scope 3 emissions, which occur offsite across the supply chain, would only need to be reported if they are material.
Legislative action has already begun nationally and in major cities across the US, introducing both “carrots” and “sticks” to prompt action among commercial real estate investors. For example, the Inflation Reduction Act (IRA) includes significant benefits to green buildings by offering increased deductions for installing solar panels, heat pumps and charging stations for electric vehicles. In New York City, most buildings over 25,000 square feet were required to meet new energy efficiency and GHG standards beginning in 2021. Stricter limits are expected to come into effect in 2030, as mandated by Local Law 97. The goal is to reduce emissions produced by NYC’s largest buildings by 40% by 2030 and 80% by 2050. In Los Angeles, policy mandates new buildings must be carbon neutral by 2030. Los Angeles City Council has a plan to shift from natural gas to electricity and reduce GHG emissions by 60% before 2035. Other cities around the country are anticipated to follow suit with similar legislation.
In addition to being a strategic and regulatory priority, a healthy and sustainable environment has become the standard for what people expect when they enter a building. Occupants want a space that contributes to their health and wellness, and increasingly, alignment with corporate sustainability strategies. The challenge for real estate, hospitality and construction companies is to take this market reality and deliver a facility that both meets rising stakeholder expectations and generates a return on their investment.
While the initial outlay of capital may seem burdensome to many real estate owners and investors, ignoring tenant needs and demands can inadvertently inhibit anticipated value growth. In addition to understanding tenant expectations, there are numerous benefits offered to companies willing to take the plunge into the ESG realm from a real estate perspective, including (but not limited to) tax credits, incentives and favorable financing. From both a social and financial perspective, owning green real estate is a path to a more sustainable future.