The sustainability reporting landscape is evolving at a rapid pace. Responding to the imminent threat of climate change, governments across the globe have put forward stringent and comprehensive reporting regulations aimed at increasing environmental transparency and mitigating the impact corporations have on the environment.

The new regulations - many of which are slated to go into effect or will otherwise be phased in throughout 2024 and 2025 – are flipping the wild west of voluntary sustainability reporting on its head. The hope is that this consolidation of voluntary frameworks into standardized regulations will usher in an era where firms must be proactive and accurate in their approach to sustainability to ensure compliance and remain competitive.

The real estate sector is responsible for roughly 40% of greenhouse gas emissions globally, positioning this sector at the forefront of change-makers when it comes to sustainability and upping the reporting requirement complexities that the real estate industry specifically faces. Factors such as the diverse nature of real estate assets, the multi-stakeholder environment and the additional investment costs to bring real estate portfolios in line with current regulations are just a few of the nuances the industry must navigate while entering a more stringent regulatory environment.

To understand how the industry can best prepare for those complexities, it’s essential to understand the current regulatory environment businesses within all sectors are facing.

The current regulatory landscape

In 2022, the U.S. Securities and Exchange Commission (SEC) unveiled a proposal that would require all publicly traded companies that meet certain requirements to disclose their Scope 1 and 2 emissions, their decarbonization goals and any climate-related risks alongside their financial filings. The proposal initially included Scope 3 emissions, or emissions that are not the direct result of a company’s activities but occur along its value chain. In March 2024, the SEC approved an updated version of this proposal which includes Scope 1 and 2 emissions reporting for large publicly traded companies but removed the Scope 3 reporting requirements and exempted small companies from reporting. While these regulations are currently held up in court, the reporting timeline is still coming soon. Larger companies will start reporting emissions for fiscal year 2026, while smaller companies will have to disclose some information for fiscal year 2027, but not emissions.

At the state level, California passed two groundbreaking climate bills requiring any large public or private company doing business within California – whether they are physically based within the state or not – to disclose climate-related metrics starting in 2026.

Local jurisdictions across the U.S. have also committed to implementing Building Performance Standards (BPS). States such as California, Washington and New York have already adopted BPS. Unlike benchmarking ordinances or building codes, BPS are more tangible and far-reaching, placing a greater emphasis on achieving specific performance targets that will drive energy savings and emission reductions.

In Europe, the European Commission adopted the European Sustainability Reporting Standards (ESRS) in July 2023, which guides companies in the scope of the European Union’s Corporate Sustainability Reporting Directive (CSRD). While on January 24, 2024, the European Parliament approved a proposal to delay the full enactment of the CSRD by two years, many reporting requirements are still set to be phased in throughout 2024 and will mandate comprehensive sustainability reporting for approximately 50,000 companies – sector-specific reporting standards and non-EU business – including U.S. companies with just one subsidiary or branch in the E.U. – reporting standards will be delayed until 2026.

The United States and the European Union are not alone in their efforts. Governments in China, Australia, Canada and more have adopted sustainability regulations. These global sustainability regulations significantly impact the real estate industry.

What regulations mean for the real estate industry

A primary characteristic of the real estate industry that makes sustainability reporting complex, is the web of varied stakeholders within the industry.

When the final version of the SEC’s proposal passes, public real estate companies and real estate investment trusts (REITs) will be required to disclose their carbon emissions and progress toward sustainability goals alongside their financial results. Corporate tenants, real estate lenders and real estate investors who are public entities will also be obligated to the same level of reporting, which will include detailed disclosures about their real estate holdings.

This means, for example, publicly traded tenants within buildings will need to rely on their landlords to share detailed information about the environmental performance of their properties. This shift will require building owners to take the necessary steps to compile and share accurate data for tenants and introduce complexities in tenant-lease agreements, prompting a careful examination of responsibilities for collecting and disclosing relevant data.

The introduction of BPS also adds a layer of costly challenges to the real estate sector. These standards, designed to specifically enhance energy efficiency and sustainability in the built environment, may require retrofits and upgrades to existing structures. Real estate companies must prepare to navigate the implications of these standards, not only in terms of compliance but also in terms of managing the associated costs, communicating the necessity of changes to tenants and investors and carefully monitoring the regulatory landscape to ensure new buildings are developed with compliance top-of-mind.

Ensuring compliance and competitiveness

No matter the situation a company within the real estate sector is in – tenant or landlord, entirely based in the U.S. waiting for the SEC’s final ruling or an international organization with subsidies in the E.U. – preparing for regulations as soon as possible is crucial.

Gathering data and establishing processes is an intricate undertaking that requires a significant time investment. Reporting for a specific year will involve compiling climate and sustainability data from the previous year – and companies need to be at least one year ahead of mandates going into effect to be properly prepared. When planning an approach to sustainability reporting, keep these strategic imperatives in mind to ensure success.

Gather accurate data. Generally, companies need historical utility usage and emissions data to generate a benchmark to report against goals. Companies can accomplish this manually by extracting data from utility bills and calculating emissions – but the process can be time-intensive. There are tools available that companies can utilize to backfill historic data and discover trends across electricity usage and emissions data. Once implemented, these tools will integrate directly into utility portals to collect bill data as it becomes available, generating insights automatically as data populates.

Align with stakeholders. Outlining responsibilities and reporting expectations with stakeholders is key within the real estate industry. Tenants and landlords may need to revisit lease agreements to outline responsibilities around reporting and establish how data collection will be shared moving forward. To avoid greenwashing, all parties must be transparent with goal setting and progress, leading with data to set realistic goals. Real estate companies wanting to effectively share their commitment to sustainability and stand against competitors may also want to consider voluntary reporting to frameworks like GRESB, a real estate-focused independent organization providing validated ESG performance data and peer benchmarks for investors and managers to improve business intelligence.

Understand the full picture. If data is not captured correctly, companies with large portfolios and disparate data sources are at risk for noncompliance. These companies should leverage an energy and sustainability management platform to integrate all quantitative and qualitative (location, property size, etc.) property data across a portfolio.

Preparing for these regulations is a strategic imperative for real estate companies. It ensures compliance with evolving standards – avoiding fines and potential legal action – and positions these companies for long-term success by enhancing asset value, attracting investment and meeting the expectations of a socially conscious market.