Scope 1 – Sustainability, Resiliency and Risk Mitigation

We had the pleasure or participating in the I-Global LP and GP Conference yesterday in New York City. In a fast moving, lots of ground covered panel headlined by Andrea Pinabell – RE Tech, Uma Moriarity – Center Square, John Forester – RMR Group, Hyon Rah – DWS and Randy Hoff – PWC which I had the honor of moderating, the discussion focused on Sustainability, ESG and Real Estate investment.

The panel covered how each of their organizations have set goals and targets for sustainability including some setting net zero 2024 goals (wow), operational efficiency and energy usage reduction goals, water and recycling goals, return on investment goals and how sustainability is used as part of the various lenses to evaluate and determine which assets to purchase and invest in and how resiliency and weather impacts like hurricanes, floods, and wild fires are relevant to decisions being made by investment committees on where to invest and where to divest assets.

We touched on the advent of Energy Star, the free tool from the EPA that has been around for decades and keeps getting better with more in depth features and analysis tools, and how it can be used to measure building performance within a market segment as well as across various market segments given that the data within the tool is normalized for weather and temperature.

The panel defined and discussed Scope 1 (the energy one consumes and the greenhouse gas (“ghg”) impact of it on site), Scope 2 (the energy one brings on site and the ghg impact from a utility) and Scope 3 (the ghg impact from one’s supply chain and one’s own travel) and why it is important to be measuring and monitoring these items, even though the final SEC Rules on Climate Disclosure did not include Scope 3 reporting, noting that the California Climate bills that were passed in 2023, do indeed include Scope 3 measuring and reporting.

We touched on the challenge of data integrity and data management when multiple geographies and product types are owned and operated but that these challenges can be met and how their organizations were indeed including sustainability features within their due diligence processes in purchasing properties and in developing them let alone operating them within their various portfolios.

Building performance on energy, water and waste within the 48 cities, 3 states and 2 counties requiring such monitoring, measuring and reporting was also reviewed as was the new Local Law 97 type mandates requiring greenhouse gas measuring and reporting and a fining regime for non-compliance in various cities like Boston, New York, Washington DC, Denver, San Francisco, etc. were continuing to appear and evolve and how such trends are being tracked by the Institute for Market Transformation (IMT) on line with an easy to see tool and map.

Lastly, we spoke of the various changes to the final rules in the SEC’s Rules on Climate Disclosure which are now the law, but which have been granted a temporary stay by the 5th Circuit, delaying their implementation but not impacting various public companies from complying anyway given the likelihood that the rules will be required at some point in the near future.

We also learned that the panelists were currently enjoying Columbia University’s Energy podcast, Monday Morning Quarterback, All In, How I Built This and the Energy Gang as their guilty pleasure ESG or other podcasts.

Green Spouts: The picture that was painted by the panelists, despite news headlines in certain business publications to the contrary, is that sustainability, weather incidents, resiliency and risk mitigation are topics that are agnostic to politics and political winds and that very large real estate companies are continuing to focus on and expand their ambit of goal setting, measuring, monitoring and acting on various energy, water, waste and social and governance issues where they believe they can obtain an appropriate return or where they are otherwise being required by law to report their results.

Duane Morris has an active ESG and Sustainability Team to help organizations and individuals plan, respond to, and execute on your Sustainability and ESG planning and initiatives. For more information, please contact Brad A. Molotsky, David Amerikaner, Joseph West, Sharon Caffrey, Sheila Rafferty-Wiggins, Alice Shanahan, Jeff Hamera, Nanette Heide, Joel Ephross, Jolie-Anne Ansley, Robert Montejo or the attorney in the firm with whom you are regularly in contact.

Last week, the California legislature passed and, over the weekend (on October 9, 2023) Governor Newsom signed, two climate disclosure bills which focus on the financial risk of greenhouse gas emissions. Full text of the bills can be found at SB 261 and SB 253.

The bills will require that companies doing business in California will be required to state and certify their scope 1, 2 and 3 greenhouse gas emissions and to state and certify their climate related financial risks.

Given that many US companies and many EU and UK companies that do business in the US also transact in California, these laws will have a meaningful impact on many public and non-public companies alike irrespective of the pace or lack thereof from the SEC on its own set of federal climate disclosure obligations.

Bill 261 – Under SB 261, companies with annual revenues of more than $500 Million Dollars that do business in California will now be required to compile and issue a biennial climate-related financial risk report, with the first due date being January 1, 2026.

Bill Text – SB-261 Greenhouse gases: climate-related financial risk. (ca.gov)

“Climate related financial risk” under SB 261 is defined as a “material risk of harm to immediate and long-term financial outcomes due to physical and transaction risks, including but not limited to, risks to corporate operations, provision of goods and services, supply chain, employee health and safety, capital and financial investments, institutional investments, financial standing of loan receipts and borrowers, shareholder value, consumer demand and financial markets and economic health.” Wow, that is a pretty wide ambit of what risks will fall within the definition of climate related financial risks!

SB 261 requires that the reports required under the Bill must be prepared in accordance with the Task Force on Climate Related Financial Disclosures (also referred to as TCFD) reporting framework. Reports that are prepared under the International Financial Reporting Standards -Sustainability Disclosure Standards (or ISSB) will also be acceptable. Failure to report under the Bill will be subject to an annual fine of up to $50,000 per year.

Bill 253 – SB 253, also known as the Climate Corporate Data Accountability Act, applies to companies that do business in California and have total annual revenues in excess of $1 Billion. The reporting requirements will not be applicable until January 2026, once the California Air Resources Board (CARB) has adopted implementing regulations, which must occur by January 1, 2025.
CARB’s implementing regulations will likely provide the key details of the reporting process, including the following:
Bill Text – SB-253 Climate Corporate Data Accountability Act. (ca.gov)

Scope 1 and Scope 2 Emissions. Beginning in January 2026, reporting entities must annually publicly disclose their scope 1 and scope 2 GHG emissions for the prior fiscal year. The bill defines Scope 1 emissions as “all direct greenhouse gas emissions that stem from sources that a reporting entity owns or directly controls, regardless of location, including, but not limited to, fuel combustion activities.” Scope 2 emissions are defined as “indirect greenhouse gas emissions from consumed electricity, steam, heating, or cooling purchased or acquired by a reporting entity, regardless of location.” Most publicly traded companies have begun some level if not a very detailed level of Scope 1 and 2 tracking, with many actually already reporting these metrics.

Scope 3 Emissions. Beginning in 2027, reporting entities will also be required to annually disclose their scope 3 emissions for the prior fiscal year. Scope 3 emissions include “indirect upstream and downstream greenhouse gas emissions, other than scope 2 emissions, from sources that the reporting entity does not own or directly control,” which may include “purchased goods and services, business travel, employee commutes, and process and use of sold products.” Many in the industry are concerned about how they are going to get their supply chain to measure and report in a meaningful way data that will become the reporting entities’ Scope 3 emissions.

Annual Fees. Reporting entities will be required to pay an annual fee to CARB upon filing their annual disclosures. These fees are supposed to be used to fund CARB’s oversight of the program.

Administrative Penalties. Reporting entities that fail to timely file their annual disclosures will be subject to administrative penalties of up to $500,000 per reporting year.

Reporting Standards. Reporting entities must measure and report their GHG emissions in conformance with the Greenhouse Gas Protocol, a set of reporting standards developed by the World Resources Institute (WRI) and the World Business Council for Sustainable Development (WBC). Reporting entities must also engage an independent third-party assurance provider to audit their scope 1 and 2 emissions beginning in 2026, and their scope 3 emissions beginning in 2030.

Green Sprouts – SB 253 and SB 261 make California the first state to require GHG emissions and climate risk reporting from large companies. The bills, which are now law, jump the SEC’s proposed climate disclosure rules which have not yet been finalized or released after two publicly disclosed delays in implementation.

Given the number of companies that “do business in California”, irrespective of when and how the SEC makes its climate disclosure rules final and if it does this fall, California has once again cemented its place of relevance in the climate change arena and has mandated movement in this space by larger companies doing business in California. It remains to be seen if other states follow their lead but surely New York, Washington, D.C., Massachusetts and others will take a very hard look at proceeding down this path.

Duane Morris has an active ESG and Sustainability Team to help organizations and individuals plan, respond to, and execute on your Sustainability and ESG planning and initiatives. For more information, please contact Brad A. Molotsky, David Amerikaner, Joseph West, Sharon Caffrey, Sheila Rafferty-Wiggins, Alice Shanahan, Jeff Hamera, Nanette Heide, Joel Ephross, Jolie-Anne Ansley, Robert Montejo, Seth Cooley, or the attorney in the firm with whom you are regularly in contact.

Tag: Scope 1

Sustainability and Real Estate – Thoughts from the I-Global Conference 3-26-24