Environmental, Social, and Governance (ESG) has sounded a drumbeat that’s been getting faster and louder for decades. But now, what used to be an optional form of risk management and valuation has fallen under the watchful eyes of the U.S. Securities and Exchange Commission (SEC).

In recent months, the Commission established Climate Disclosure Rules to enhance and standardize climate-related disclosures by public companies and in public offerings, an action that has significant implications for the commercial real estate (CRE) industry. Stakeholders are being especially challenged to reevaluate their portfolios and businesses to ensure ESG compliance.

Numerous U.S. states, non-governmental organizations (NGOs), and climate advocates, however, were not so ready to go gentle into that good night without a fight — and filed challenges to the recently adopted SEC Rules. The SEC was so inundated by response that the Commission voluntarily stayed implementation less than a month after the rules were launched, pending completion of judicial review in the Court of Appeals.

Understanding ESG
To better understand the crossroads at which we find the SEC’s Climate Disclosure Rules, it helps to better understand ESG — and how we’ve arrived at this point.

The term “ESG” reportedly first appeared in the 2004 United Nation’s report, “Who Cares Wins: Connecting Financial Markets to a Changing World.” The report proposed recommendations and guidelines on how to “better integrate environmental, social and corporate governance issues in asset management, securities brokerage services and associated research functions.”

ESG is a three-pillar group of considerations that offers a view into a company’s overall sustainability. Environmental refers to a company’s impact on the environment; Social refers to stakeholder relationships and wellbeing; and Governance refers to the ethical management of a company. The expectation is that it’s good for business and can add significant savings and value — especially for CRE.

In 2015, ESG continued to gain political strength amid international climate discussions when the United Nations presented its 2030 Agenda for Sustainable Development. It provided a comprehensive blueprint for 17 sustainability goals, including industrialization and infrastructure, clean energy, and healthy cities, among others.

The Paris Agreement — an international treaty on climate change — was further adopted in 2015. More recently, we saw the introduction of the 2023 European Sustainability Reporting Standards that established a benchmark pertaining to ESG reporting for companies within the European Union (EU). That measure took effect at the beginning of 2024.

Also in 2023, the International Sustainability Standards Board issued its updated sustainability disclosure standards “to improve trust and confidence in company disclosures about sustainability to inform investment decisions” and for the first time, “create a common language for disclosing the effect of climate-related risks and opportunities on a company’s prospects.”

As part of re-entering the Paris Agreement, the White House announced in 2021 its own ambitious goal of achieving net-zero emissions by 2050 across the economy via a whole-of-government approach that weighed in standards, incentives, programs, and support for innovation.

In California, the Golden state made headlines last year when Governor Gavin Newsom signed into law a first-in-the-nation bill that requires thousands of businesses to disclose “climate-related financial risk and measures adopted to reduce and adapt to climate-related financial risk” by 2026.

A New Layer of SEC Compliance — Stayed Under Review

In March 2024, the SEC launched updated criteria that enhances and standardizes climate-related disclosures by public companies and in public offerings. According to the SEC, “the rules reflect the Commission’s efforts to respond to investors’ demand for more consistent, comparable, and reliable information about the financial effects of climate-related risks on a registrant’s operations and how it manages those risks while balancing concerns about mitigating the associated costs of the rules.”

SEC Chair Gary Gensler added, “These final rules build on past requirements by mandating material climate risk disclosures by public companies and in public offerings. The rules will provide investors with consistent, comparable, and decision-useful information, and issuers with clear reporting requirements. Further, they will provide specificity on what companies must disclose, which will produce more useful information than what investors see today. They will also require that climate risk disclosures be included in a company’s SEC filings, such as annual reports and registration statements rather than on company websites, which will help make them more reliable.”

As noted earlier, the newly establish criteria is already facing legal challenges, and the current stay set forth on April 4, 2024, affords companies, notably Large Accelerated Filers (LAF), additional time to prepare for the time when litigation is finally settled. Under the schedule as originally adopted, compliance was set to go into effect with staggered deadlines, dependent upon a company’s classification and the information being reported, including:

  • Large Accelerated Filers (LAF): Requirements for disclosures and financial statements go into effect during FYB 2025 and FYB 2026. Requirements for GHG reporting and assurances go into effect for FYB 2026, followed by FYB 2029 (limited assurance) and FYB 2033 (reasonable assurance).
  • Accelerated Filers (AF): Requirements for disclosures and financial statements go into effect during FYB 2026 and FYB 2027. Requirements for GHG reporting and assurances go into effect for FYB 2028, followed by FYB 2031 (limited assurance).
  • Non-Accelerated Filers (NAF), Smaller Reporting Companies (SRC), and Emerging Growth Companies (EGC): Requirements for disclosures and financial statements go into effect during FYB 2027 and FYB 2028. GHG emissions reporting is not required.
    • KBS’ portfolio of funds, for example, falls under the NAF category and are not subject to the disclosure and financial statement effects audit until FYB 2027.

 

CRE SEC Regulations and Beyond
Having the biggest impact on climate change, CRE has long been under regulatory scrutiny. Research shows that the industry is responsible for nearly 40% of global carbon dioxide emissions — with approximately 70% of emissions produced by buildings’ operations and 30% from construction. This means most property owners have plenty of wiggle room to trim the fat, so to speak. With this insight, CRE has ample room to develop and shape strategies for complying with SEC regulations.

KBS, for instance, is furthering its commitment to being an industry ESG leader, setting the goal of achieving a 5% greenhouse gas emissions reduction by 2025. This includes emissions under the company’s direct control and on-site emissions generated by tenants in the properties that KBS manages.

Also demonstrating its continuing pledge to ESG transparency and improved performance, KBS was recognized for sustainability and received a Green Star designation in the 2023 GRESB Real Estate Assessment.

KBS and its affiliated companies have completed transactional activity of more than $44.9 billion on behalf of private and institutional investors globally via 16 separate accounts and six commingled funds, for government and corporate pension funds. Additionally, KBS has sponsored five sovereign wealth funds and seven SEC-registered, non-traded REITs as well as a publicly traded Singapore REIT.

“KBS views sustainability among its top values as a real estate owner and operator. The ranking from GRESB validates our initiatives over the past several years,” says Marc DeLuca, CEO and Eastern regional president of KBS. “The firm is honored to be recognized among some of the world’s largest real estate companies.”

Closing Thoughts on SEC Regulatory Compliance
Despite the current delay facing the SEC Climate Disclosure Rules, regulation is inevitable, and it’s only a matter of time until the clock runs out on impeding progress. Data is undoubtedly going to be all the more critical in the future of reporting and compliance. Regulatory examiners aren’t going to be interested in anecdotes; they’ll likely be more interested in comprehensive analysis that provide clear insights into the ESG impact of a building or CRE portfolio, as well as that of a company’s overall business.

What this all means is that there’s a new drumbeat sounding — the promise of a more sustainable, resilient, and environmentally conscious future.

Learn more at KBS.com/Insights.