Hurricane harm in Florida from Hurricane Idalia. USB has estimated the storm has created almost $10 billion in harm. (Shutterstock)
Now greater than ever, reporting on local weather threat issues to actual property. There have been some world modifications to the climate-related monetary disclosure requirements that ULI members ought to pay attention to.
Over the previous decade, the narrative surrounding the connection between local weather and enterprise has advanced considerably. It’s now nicely understood that local weather change poses dangers to the steadiness of the economic system and the monetary techniques. Because of this, traders—and different stakeholders—have been more and more to grasp not solely corporations’ affect on local weather (for instance by means of greenhouse fuel (GHG) reporting) but additionally methods by which local weather can affect corporations’ funds.
The emergence of the Activity Drive on Local weather-related Monetary Disclosures (TCFD), established as a part of the G20, in 2015 was a breakthrough second in local weather reporting. The TCFD developed a set of really useful disclosures for organisations to tell traders, and different stakeholders, of the climate-related monetary dangers they face. This was one of many key drivers behind the gradual integration of climate-related dangers into mainstream monetary threat administration, now set to turn into a regulatory requirement in some jurisdictions, together with the E.U., the UK, New Zealand, Singapore, Canada, Japan, and South Africa.
In 2021, the Worldwide Monetary Reporting Requirements (IFRS) Basis—initially accountable for monetary accounting requirements—established the Worldwide Sustainability Requirements Board (ISSB), with the purpose of creating common, world sustainability disclosure guidelines. These new guidelines have been lastly revealed in June 2023, they usually got here with the announcement that the ISSB will take over accountability for monitoring corporations’ climate-related disclosures from the TCFD. This transfer signifies additional alignment between monetary and ESG reporting, with a selected emphasis on local weather threat. It additionally goals to simplify and consolidate the panorama, eliminating the necessity for duplicate reporting, which the constructed setting sector has been calling for. Helen Gurfel, head of sustainability and innovation at CBRE Funding Administration, mentioned: “The actual property {industry} will profit from the consolidation of initiatives and a discount in redundant reporting. The ISSB is nicely positioned to observe and alter the requirements as local weather and sustainability disclosures mature and evolve.” She added: “The IFRS Basis and ISSB have demonstrated true management of their strategy to setting the brand new requirements. By integrating and constructing on the well-established suggestions of the TCFD, they’re serving to to drive consistency and consolidation in local weather disclosures.”
The ISSB’s inaugural sustainability disclosure requirements, IFRS S1 and IFRS S2, are efficient from January 1, 2024, and are supposed to turn into a world baseline, permitting traders with worldwide portfolios to make selections based mostly on constant and comparable info.
IFRS S1—in any other case often known as Normal Necessities for Disclosure of Sustainability-related Monetary Info—allows corporations to speak the broader sustainability-related dangers and alternatives they face over the brief, medium, and long run, ensuing from, as an example, modifications within the portfolio’s vitality consumption and or integrating vitality administration issues into their funding evaluation and operational technique.
IFRS S2, Local weather-related Disclosures, focuses on local weather change mitigation and adaptation and is designed for use along side IFRS S1, masking such matters as proportion of property uncovered to climate-related hazards (e.g. flooding, water stress, or warmth stress) and techniques to mitigate the dangers related to that publicity.
Each requirements comply with the construction of TCFD’s 4 pillar strategy: governance, technique, threat administration, and metrics and targets. As well as, the necessities set out in IFRS S2 are in step with the 4 core suggestions and eleven really useful disclosures revealed by the TCFD.
Darryl Stuckey, head of sustainability transformation—setting at Lendlease, mentioned: “Lendlease applauds the trouble to combine reporting techniques globally, and was proud to take part within the ISSB stakeholder engagement course of. As an early adopter of TCFD we’re nicely positioned to additional evolve our company disclosure and stay up for integrating the brand new ISSB normal into our reporting, in accordance with the Australian authorities’s timeline for necessary local weather disclosures.”
As IFRS S1 and S2 are so intently aligned to the TCFD framework, corporations that apply the ISSB requirements is not going to want to finish a separate TCFD report. Nonetheless, there are some key variations between the ISSB requirements and the TCFD steerage. To start with, the ISSB emphasizes the connection between sustainability-related monetary disclosures and monetary statements, asking corporations to supply each on the similar time and in the identical place, as part of the final monetary reporting. Secondly, not like TCFD which is sector-agnostic, IFRS S1 and S2 comprise extra necessities on industry-specific disclosures, asking corporations to think about sustainability-related matters and metrics which might be most definitely to be materials to them, as recognized by the Sustainability Accounting Requirements Board (SASB). The industries masking the constructed setting sector, in keeping with SASB, embody dwelling builders, actual property companies, and actual property. For every of those industries, SASB developed an inventory of related disclosure matters and metrics: Within the case of the actual property {industry}, as an example, this contains operational vitality and water, tenant sustainability impacts, and local weather change adaptation efforts. “The brand new requirements will assist organizations talk and report on a posh matter in a structured and uniform method, whereas additionally offering decision-useful info to traders relevant to the sector”, commented Gurfel.
The IFRS S2 normal expands even additional on the TCFD framework, stressing the necessity for quantitative info the place doable, and emphasizing that disclosing climate-related alternatives is as necessary as disclosing climate-related dangers. It additionally requires disclosure of Scope 1, Scope 2, and—most notably— Scope 3 emissions, together with info on financed emissions for corporations in asset administration, industrial banking or insurance coverage. Lastly, IFRS S2 asks organizations for extra element on an organization’s climate-related targets, together with info on how they’re aligned with the Paris Settlement, whether or not they have been validated by a 3rd social gathering, and whether or not corporations are planning to make use of any carbon credit to realize them.
You will need to word that the brand new ISSB requirements are supposed to function a world baseline, setting minimal reporting necessities. Some jurisdictions—and a few traders—will anticipate to see greater than what’s dictated by the IFRS S1 and S2. A key instance of that is the strategy to materiality. As outlined by the ISSB, materials info that must be disclosed contains “all sustainability-related dangers and alternatives that would fairly be anticipated to have an effect on the corporate’s prospects—its money flows, entry to finance or value of capital over the brief, medium or long run.” This differs from the European Sustainability Reporting Requirements, for instance, and their double materiality strategy, which requires corporations to report not solely on how sustainability points would possibly create monetary dangers for the corporate (monetary materiality) but additionally on the corporate’s impacts on individuals and the setting (affect materiality). Though having a world baseline is a crucial step in direction of elevated consolidation and consistency of reporting, corporations will nonetheless must adapt their approaches relying available on the market they function in, and the expectations of their stakeholders.
It’s now well known that sustainability- and climate-related points are materials to corporations’ funds, and traders more and more combine the knowledge on sustainability dangers and alternatives into their decision-making. The upcoming ULI and Heitman report, Change is Coming: Local weather-Threat Disclosures and the Way forward for Actual Property Funding Resolution-Making, will discover in additional element how local weather disclosures are utilized in funding selections. Now you can register for a webinar that opinions the findings of the report, held on October 4th and 5th.
Early subsequent yr, ULI may even publish a primer on what the ISSB requirements and modifications to local weather threat reporting imply to the actual property sector. For a complete overview of the present ESG reporting panorama, see ULI’s Mapping ESG report, and for detailed info on valuing transition dangers related to the transfer in direction of a low-carbon economic system, see ULI’s Transition Threat Evaluation Pointers.
