Weathering the Storm: SEC Proposes Expansive Climate Disclosures, Big Potential Impact to Real Estate Companies
The Securities and Exchange Commission (“SEC”) has periodically evaluated its regulation of climate change disclosures. In response to increased investor demand for climate and other environmental, social and governance factors, the SEC recently proposed rules that would require publicly traded companies to disclose extensive climate-related information in their SEC filings (registration statements and annual reports). Questions have arisen about whether the existing disclosure requirements effectively inform investors about known material risks, uncertainties, impacts and opportunities.
“We are concerned that the existing disclosures of climate-related risks do not adequately protect investors […] we believe that additional disclosure requirements may be necessary or appropriate to elicit climate-related disclosures and to improve the consistency, comparability, and reliability of climate-related disclosures.”
Securities and Exchange Commission, April 11, 2022
The following are key takeaways from the SEC proposal:
- Companies would need to disclose the impacts of severe weather events and other natural conditions and transition activities. Such disclosure would cover two types of climate-related risks: physical risks and transition risks. For example, a company would need to disclose how a future severe weather event like a hurricane would impact the business (or value) in the short-, medium-, or long-term.
- Companies would need to disclose their carbon footprint and greenhouse-gas emissions, both directly, from assets owned or controlled by the company, and indirectly, from energy utilized by the company.
- Some companies would also be required to disclose a third tier of emissions – emissions from upstream and downstream activities of a company’s operations. Upstream activities may include activities by a party other than the reporting entity that relate to the initial stages of the production of the company’s good or service, such as the sourcing of materials, processing of materials and/or activities of a supplier. Downstream activities may include activities by a party other than than the reporting entity that relate to the processing materials into a finished product and delivering it or providing a service to an end user, including the transportation and distribution, processing of sold products, use of sold products, end of life treatment of sold products, and investments.
The proposal by the SEC began a 60-day period of public comment. The SEC will assess the feedback it receives and incorporate it into a final version of the rules. If the final rules take effect, the largest companies could be required to start reporting these expansive climate disclosures beginning in fiscal year 2023.
And lastly, while the proposed regulations would only affect publicly traded organizations (read: they would not affect privately held real estate companies), such changes are expected to have a significant impact on capital markets.
Thanks to Courtney DeVane and Amber Beason for their assistance with this blog post.
Source: SEC.gov, FederalRegister.gov
- Carey M. Heyman, CPA
- Managing Principal of Industry - Real Estate
- CliftonLarsonAllen LLP
- Century City (Los Angeles)
Carey is the Managing Principal of the Real Estate Industry at CLA. He is a trusted advisor with close to 20 years of experience providing accounting, assurance, tax, and consulting services to real estate industry owners, operators, family offices, developers and syndicators. Carey has a strong track record of helping clients build and retain capital by leveraging tax- and cost-saving strategies and employing tax credits and incentives. He also consults with high net worth individuals, large family groups, and owners of closely-held businesses on all aspects of tax planning, estate planning, and retirement planning.
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