Smart Cities

By Standardizing Climate Change Disclosures We Can Drive Greener Investment

Today, April 22nd, marks Earth Day, now widely recognized as the largest secular observance in the world. Since 1970, Earth Day has brought together a global community that has grown to over a billion people who use the date as a day of action to change human behavior and drive global, national, and local policy changes related to climate change and sustainability. Each year Earth Day follows a new theme within the climate debate and this year that theme is “Invest In Our Planet”. “When it comes to climate change, money talks. Through regulations, incentives, and public/private partnerships, governments hold the keys to transform and build the green economy,” reads the official Earth Day announcement for 2022. “Similar to the industrial and information revolutions, governments must incentivize their citizens, businesses, and institutions to build a resilient future. Ultimately, governments will empower green business practices as not only the ethical option but also the lucrative one.” Echoing […]

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Today, April 22nd, marks Earth Day, now widely recognized as the largest secular observance in the world. Since 1970, Earth Day has brought together a global community that has grown to over a billion people who use the date as a day of action to change human behavior and drive global, national, and local policy changes related to climate change and sustainability. Each year Earth Day follows a new theme within the climate debate and this year that theme is “Invest In Our Planet”.

“When it comes to climate change, money talks. Through regulations, incentives, and public/private partnerships, governments hold the keys to transform and build the green economy,” reads the official Earth Day announcement for 2022. “Similar to the industrial and information revolutions, governments must incentivize their citizens, businesses, and institutions to build a resilient future. Ultimately, governments will empower green business practices as not only the ethical option but also the lucrative one.”

Echoing that green investment theme, the Securities and Exchange Commission (SEC) has proposed a new set of rules to enhance and standardize climate-related disclosures for investors. This landmark policy shift for the SEC will have a direct influence on publicly-listed companies (PLCs) in the US and the huge swathes of environmentally impactful real-estate those firms are responsible for. This Earth Day, we discuss the impact of the new SEC rules on PLCs and the smart buildings market.

At the core of the proposed rule changes is the requirement for listed-companies to disclose greater information about their governance of climate-related risks and relevant risk management processes. That disclosure process should identify what kind of material impact climate-related risks will have in the short-, medium-, and long-term, including the impact on business operations and consolidated financial statements or estimates. PLCs will have to disclose information about their direct greenhouse gas (GHG) emissions and indirect emissions, such as from purchased electricity or the up- and down-stream activities in its value chain.

These proposals for GHG emissions disclosures would provide investors with actionable insight to assess a company’s exposure to, and management of, climate-related risks, and green transition risks. The proposed rules would provide a safe harbor for liability from emissions disclosure, working in a similar way to the information that many companies already provide based on established frameworks, such as the Task Force on Climate-Related Financial Disclosures or the Greenhouse Gas ProtocolThe new disclosures will allow investors to assess the green credentials and sustainability of business strategies, in order to support their investing decisions, and should drive a new wave of green-thinking in corporations.

"Our core bargain from the 1930s is that investors get to decide which risks to take, as long as public companies provide full and fair disclosure and are truthful in those disclosures. Today, investors representing literally tens of trillions of dollars support climate-related disclosures because they recognize that climate risks can pose significant financial risks to companies, and investors need reliable information about climate risks to make informed investment decisions", said SEC Chair Gary Gensler in an interview with CNBC.

“Today’s proposal would help issuers more efficiently and effectively disclose these risks and meet investor demand, as many issuers already seek to do. Companies and investors alike would benefit from the clear rules of the road proposed in this release. I believe the SEC has a role to play when there’s this level of demand for consistent and comparable information that may affect financial performance. Today’s proposal thus is driven by the needs of investors and issuers," Gensler continued.

These climate-related disclosures are not just about allowing environmentally-friendly investors to “put their money where their morales are”, but rather create a new form of performance metric that gives investors a more accurate view of companies’ growth potential in this age of environmentalism. Considering the growing green pressure from the public, consumers, staff, talent, and investors, corporations with a poor environmental status and limited green strategies are expected to suffer economically, making them a less attractive investment. Just like the risks associated with business expansion, supply chain security, or R&D investment, a PLC’s environmental approach is now fundamental to its success and its investor’s ROI.

Corporate giants like Amazon, Apple, Google, and Microsoft have already shown their support for the SEC proposal, and this may come as no surprise as these firms already disclose a lot of climate change-related information and bold targets as a means to drive their own green brand image. Major property-related companies, like CBRE or Prologis, have also been disclosing climate change-related information on their own real estate portfolios, as a strategy to attract the best tenants in this green-economy era. What the new SEC proposal does, is standardize the disclosure of climate change information to allow true comparisons between potential investments in publicly-traded companies.

The new SEC proposal will make building portfolios the low-hanging fruit for corporations seeking to improve their “environmental status” before such disclosures come into full force, and then a constant source of improvement year-on-year. Electricity and water efficiency, renewable energy generation, emissions and waste management all offer established systems for improvement and measurement that will likely play a big part in future SEC disclosures. The SEC proposal alone will trigger climate-change conversations in every US-based PLC and the introduction of the policy will drive action, this is expected to have a direct impact on the adoption of green smart building technology in the corporate environment.

Despite broad support for the new disclosure proposal, there is also significant resistance within the US. SEC commissioner Hester Peirce, appointed in 2018 by President Trump, voted against the proposed rule change, arguing that companies should be able to “disclose their performance through their own eyes.” In a dissenting statement titled ‘We are Not the Securities and Environment Commission – At Least Not Yet,’ Peirce states that the new rule lacks a materiality limitation, an adequate statutory basis, or credible rationale. The proposal will remain open to public comments until at least May 20th, 2022, and significant changes are expected to the final policy, but whatever shape the new rule takes, it is likely to represent a big step in environmental accountability and green investment that will drive adoption of greener and smarter buildings.

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