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Real Estate’s Sustainability Challenge

Real Estate Opportunities in the Energy Transition Background Image

Transitioning to a carbon-neutral economy will require meaningful commitment and action from nearly every major industry. Automakers must electrify much of their fleets. Farmers must adopt climate-smart practices that help soil store more carbon. Miners must ramp up output to meet soaring demand for raw materials.

It’s a list that could stretch for pages. But if the energy transition is going to succeed, no industry will likely be more important than real estate. Buildings and construction accounted for 37 percent of global energy- and process-related carbon dioxide emissions in 2021, according to the International Energy Agency, far more than any other industry.

Real estate owner-operators now face intensifying pressure to deliver greener buildings — and not just from climate scientists. Investors are directing more capital into sustainable real estate, and tenants are increasingly demanding more sustainable buildings.

As owner-operators work to meet these expectations, some will likely face claims of greenwashing — the practice of advertising products or services as more environmentally friendly than they actually are. These allegations are often serious and carry major risks. Yet there are steps that diligent owner-operators can take to protect themselves from these risks.

Goals, Progress, and Disclosure

Navigating greenwashing risks begins with setting achievable, measurable goals. Any real estate owner-operator can set a sustainability goal — say, reducing the emissions of an office building by 20 percent by 2030. But to make such a goal advisable, owner-operators must first ensure that reaching the goal is within their control, and clearly define what they plan to measure.

This means determining the sources to include in their emissions calculations. Owner-operators who choose to include the emissions of their suppliers, for example, must be sure that the suppliers are also tracking their emissions, measuring them in the same way, and — ideally — holding themselves to similar goals.

It also means establishing a clear starting point. Before embarking on an emissions-related goal, owner-operators must ensure that they can determine how much carbon they’re emitting when the goal is set — a complex task requiring substantial investments in technology and expertise.

The next step is for owner-operators to track progress against their goals. This work requires establishing robust internal controls and processes. Owner-operators need to ensure that they are able to collect clear, complete, and accurate data, and that they have the tools, technology, and workflow in place to analyze the data. Owner-operators should also consider ahead of time the steps they may need to take relative to their sustainability goals in response to the data they collect.

Good practices here include building out a dedicated team— in-house, if possible — with clearly defined roles and responsibilities. A broad, highly collaborative team — equipped with experience not only in sustainability but also in data, compliance, audit, and risk — can track progress against goals at frequent intervals, while identifying and troubleshooting any issues that may arise.

Then, there is disclosure. In sharing their emissions-reduction progress with tenants and investors, owner-operators should consider how they will disclose the material assumptions, exclusions, parameters, and scope they rely on to make sustainability-related claims, as well as the methodologies they use to calculate their emissions and progress in reducing them.

Owner-operators should also identify the climate reporting frameworks they’re using, and consider aligning them with the well-established frameworks that their investors use — and that many of their corporate tenants may be required to use under the SEC’s proposed climate disclosure rule. Although private owner-operators won’t be subject to the rule once adopted, they can simplify their efforts here by using the rule’s requirements as a guide.

Managing the Unknown

Sustainability is proving to be an ever-evolving space, especially so for real estate, where many efforts are still just getting off the ground. Expect this evolution to continue, as more data and technology become available, new risks emerge, and experts recalibrate what the industry — and the world — need to reach net zero.

But if these factors or others disrupt owner-operators’ ability to reach their sustainability goals, don’t expect tenants, investors, or government regulators to be forgiving. Instead, owner-operators should plan for moving goalposts, and prepare for their emissions-reduction records to be viewed with the benefit of 20/20 hindsight.

For this reason, owner-operators would be wise to consider carefully how they portray their sustainability work. Whether in press releases, reports, regulatory filings, websites, social media, or elsewhere, anything they say in this area should be well documented and supported.

A key point to remember: Real estate owner-operators need not actually engage in greenwashing for allegations against them to be harmful. Greenwashing allegations can irreparably damage an owner-operator’s hard-earned reputation, invite sharp legal and regulatory scrutiny, and be highly time-consuming and expensive to defend. The risks are too great to ignore, and owner-operators who take them seriously will be best positioned to reach their sustainability goals.

Read the original article here.

This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.