Most real estate investment trusts—70 percent, according to recent industry data—voluntarily report selected environmental, social and governance (ESG) metrics, often on their corporate websites. And the U.S. Securities and Exchange Commission requires REITs and others with public filing requirements to disclose material information about the risks and impact of climate change on their businesses, as deemed material by the issuer.
Significant revisions about what REITs and others must disclose are anticipated in the months ahead. The SEC is considering a new reporting framework for ESG information that is expected to require greater disclosure about climate change issues and offer less discretion to executives about what they may or may not report. Similar ESG-related disclosure changes are expected in the areas of human capital management and board diversity, as well.
While the rules are still being formulated, SEC officials have made clear that change is on the horizon for ESG disclosure regulation. “Today’s investors are looking for consistent, comparable, and decision-useful disclosures around climate risk, human capital, and cybersecurity. I’ve asked staff to develop proposals for the Commission’s consideration on these potential disclosures,” SEC Chairman Gary Gensler told Congress in September. “These proposals will be informed by economic analysis and will be put out to public comment, so that we can have robust public discussion as to what information matters most to investors in these areas.”
REIT Industry Positions
The National Association of Real Estate Investment Trusts (NAREIT), which represents the REIT industry globally, commented on the proposed changes to the disclosure requirements in a June letter to the SEC.
Among other issues, the organization urged the SEC to adopt a “principles-based” approach to the disclosure regime. A principles-based approach provides executives more control over what should be reported depending on the type of business they oversee. A more “prescriptive” approach would mean that the agency would require every business to disclose the same information, no matter what kind of business they conduct. SEC officials have indicated that the new rules may include prescriptive elements.
Another key point for commercial property owners will be how far they will need to go in their reporting process. Will they be responsible for disclosing their own climate change issues and those of tenants as well? NAREIT, in its letter, advocated for rules that would allow REITs to report only “climate change information and data arising from operations under their direct and immediate control, and that commercial real estate tenants and supply chain contractors should, in turn, be responsible for disclosures of data arising from their own business operations.”
At present, the NAREIT letter noted, there is no dominant practice in the REIT sector for verifying climate change data and no consensus on the scope or methodology for such assurance, or the breadth of data that should be subject to such assurance. “This diversity of practitioners and practices tracks national trends among all corporate issuers,” NAREIT wrote. As a result, “the SEC should provide issuers with the flexibility to select assurance practices that meet the needs of their businesses and also provide sufficient lead time for REITs and other issuers to incorporate third-party assurance, or other verification processes, into their reporting,” NAREIT said.
Preparing for Change
The new disclosure regulations will likely gauge management and strategy around climate and other ESG matters; financial issues caused by climate change; greenhouse gas emissions from a company’s operations; whether the company is reaching climate change-related benchmarks, such as emission reductions; and whether the company is preparing for other states, federal, and international ESG disclosure requirements. The use of terms such as “green,” “low carbon,” or “sustainable” may also be subject to new data metrics and scrutiny.
In preparation, REITs and others with public disclosure requirements should spend time before the new rules are released considering which ESG-related issues are important to the business and how the enterprise can best gather information and report about climate change and other key ESG matters. As part of the process, they might ask the following questions:
- Are policies, controls and procedures in place to accurately report ESG information? Are employees aware of the importance of following such controls and that statements made by a publicly reporting enterprise are governed by federal securities laws?
- Are company claims about climate change or pledges to achieve climate change goals rooted in fact? Are controls in place to track such claims and pledges?
- Should the board of directors, or a committee of the board, oversee ESG issues or should the task fall to top managers?
- Is the company reporting on the ESG issues that are most important to current or prospective investors? And is it telling the same ESG story across SEC filings, company reports, and other communications?
We will continue to monitor the SEC’s actions on ESG disclosure requirements in the weeks and months ahead. To learn more, contact us for a consultation.