A Call to Action - Your Help is Needed
The public comment period is coming to a close on the SEC proposed rule regarding climate-related disclosures. Making sure the rule makers are educated on the availability of data is critical.
The conversation around ESG is increasingly one of risk and opportunity. Particularly when it comes to risk, we tend to react to perceived risk, but on rare occasions, we have an opportunity to impact that risk proactively. The proposed SEC rule regarding climate-related disclosures for investors is one such opportunity. While ensuring that investors are made aware of potential climate risks is fundamentally important and a needed measure, there are flaws in the concept that likely those calling for its implementation do not fully understand.
This is where we as ESG professionals owe it to our organizations and ourselves to advocate and educate, but we have a short window to do so. This Friday, June 17, the public comment period closes. This is one that would be worth your while to give your input on. Perhaps if enough of us educate the SEC, the defects can be cured before we are faced with having to figure out how to comply with a rule that has some serious issues.
If you are unsure what I am talking about, on March 21, 2022, the US Securities and Exchange Commission proposed rules to enhance and standardize climate-related disclosure for investors. There have been multiple articles around this as it is a significant event that promises to impact any publicly reporting entity, from publicly traded companies to registered REITs.
“The proposed rules also would require a registrant to disclose information about its direct greenhouse gas (GHG) emissions (Scope 1) and indirect emissions from purchased electricity or other forms of energy (Scope 2). In addition, a registrant would be required to disclose GHG emissions from upstream and downstream activities in its value chain (Scope 3), if material or if the registrant has set a GHG emissions target or goal that includes Scope 3 emissions.” per the press release.
On its surface, this seems easy enough - many of us already disclose or at least calculate our GHG emissions. However, the proposal calls for the disclosure to be included in the annual 10-K filing. Important to note as the 10-k filing has a required due date within 60 days for Large Accelerated filers, within 75 days for Accelerated Filers, and within 90 days for Non-Accelerated Filers after the end of the fiscal year. It is important to note that these disclosures are proposed to be treated as “filed” rather than “furnished.” This means they would be subject to potential liability under Section 18 of the Exchange Act or Section 11 of the Securities Act, as applicable. Thus, most organizations want to assure the results via a third-party registered accounting agent.
Why is this important?
Attaching the disclosure requirement to the Form 10-K discounts the billing cycle of utility companies, which is often 15-45 days post meter read and may include later corrected estimates, sometimes as late as 120 days post meter read.
The calculation of Scope 1 and Scope 2 (as well as Scope 3 tenant emissions) is based on receiving those utility bills. Any assurance auditing exercise would compare the utility bill’s stated consumption against the GHG calculation.
For a large emitter, your 60 days to file has potentially been reduced to 15 - for calculation, verification, statement preparation, and assurance. That is a lot to do in two weeks.
This may also impact what emissions targets or goals you publicly disclose. Suppose you are claiming to hit “net-zero” emissions, and you are including whole-building emissions in that target. In that case, you will also have to capture assurable data from tenant-controlled electrical or natural gas consumption if the reporting entity owns the property. This poses a particular problem for Multifamily Real Estate and Triple Net Leased Real Estate: in approximately 25-30% of the utilities across the United States, the utility company will not share that data with the property owner. Why? The utility contract is an agreement between the tenant and the utility company, a contract to which we, as the property owner, are not a party. This requires we consider the implications of some of our publicly stated ESG Goals.
Some jurisdictions have addressed this by enacting benchmark reporting ordinances that compel the utility company to provide the building owner with whole-building data. There is a catch here, however. Most of these laws do not specify the frequency in which that data has to be provided, and if they do, it often references the due date set by the benchmarking reporting law - not the end of the owner’s fiscal year. For example, in California, AB802 requires annual reporting of whole-building energy consumption on June 1, so most utility companies provide this data in May. An issue if your fiscal year corresponds with a physical year.
There is a potential cure for this, which would be the SEC to match the logic that GRESB and others apply. Most annual ESG reports cover the prior physical year and have due dates around June or July. This 6 to 7-month period provides the report preparer the necessary time to collect the data, verify the accuracy, calculate, prepare the report and potentially have the results audited.
Two potential fixes could be applied: separate the climate-related disclosure from the Form 10-K and set the due date six months post fiscal year close or set the data reporting period for climate-disclosure data included in the Form 10-K to be at least six months before the end of the fiscal year - or make it simpler and just have the filer report on the prior physical years ESG data.
As I said earlier, there are still a couple of days that you can proactively voice your concerns. The SEC public comment period ends this Friday, and submitting comments is easy. Simply follow this link → (Submit Comments on S7-17-22). This will take you to a form page on the SEC site. It is an easy-to-fill-out online form, or you can also attach comments via a file upload.
The bottom line is that those proposing the rules don’t have insight into the required data availability. We, as ESG professionals, however, will be tasked with collecting that data and, due to the nature of billing periods, will spend more than 50% of the data collection period waiting on the utility company to provide us with the data so we can start. We can fix this, but our collective voices are needed to mold what is a good idea into an idea that can be reasonably completed.
You can help reduce the impact of the built environment by sharing this blog with your peers and hitting the “like” button where you read it. Together we can impact the 39% of greenhouse gasses attributed to the built environment. It starts with awareness, and we succeed with teamwork.
Stay well!
Chris Laughman is the ThirtyNine Blog author, a blog dedicated to reducing the impact of the built environment. When not blogging, Chris is helping the real estate industry minimize energy and water impact as the Vice President of Sustainability for Conservice, the Utility Experts. Whether Multifamily, Single Family, Student Housing, Commercial, or Military, we simplify utility billing and expense management by doing it for you. Our insight into your utility consumption provides an opportunity to identify risks. Leveraging innovation and experience, we ignite solutions with real impacts and track performance to ensure the trendline stays laser-focused on the goal. At Conservice, we have developed a true bill-to-boardroom solution to help truly make a difference. We have before us a tremendous opportunity. Standing shoulder to shoulder, we will get this done. Contact me at claughman@conservice.com for more information.
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