2023 is very likely to see considerable development in the landscape for sustainability disclosures. Broadly speaking, sustainability and ESG reporting has been moving from being largely voluntary to becoming a regulatory requirement. Examples include the EU Taxonomy regulation and its UK equivalent Green Taxonomy, Corporate Sustainability Reporting Directive (CSRD), Task Force on Climate-related Financial Disclosures (TCFD) aligned comply or explain rules,  and SEC ESG Disclosures for Investment Advisers and Investment Companies. The effects of these proposed and upcoming sustainability reporting rules and standards in the UK, Europe and US will stretch beyond the direct impact for the corporates and investment funds that fall within their scope.

Sustainability and ESG disclosures should provide companies and investors with decision-useful information that may affect future financial performance and be critical to make investment decisions to transition to net zero. However, currently, different information is disclosed by companies, varying by its contents, detail, and format. For instance, despite the wide application of the Greenhouse Gas (GHG) Protocol across the real estate industry, there’s still a lot of variation in how companies interpret and use the Protocol, alongside data availability and data quality challenges. This is especially the case for Scope 3 value chain GHG emissions, as well as the models for assessing climate change risks and opportunities. There’s also a large variety of disclosure standards, frameworks and guidelines being applied that often require different indicators and presentation of data.

Common global and aligned local frameworks and technical industry-specific standards are needed to mandate and promote transparent, reliable, and timely sustainability disclosures.

On the whole, the key objectives of these frameworks are:

• Increasing transparency, addressing the existing information gap;
• Promoting consistent, comparable disclosures;
• Greater public accountability by requiring organisations to take responsibility for their ESG impacts;
• Helping investors and other capital market participants to make informed investment-decisions;
• Improving the allocation of capital to companies engaged in sustainable activities.

Strong focus on climate-related risks, metrics and environmental impacts will help to drive improvements in GHG emissions accounting and TCFD-aligned disclosures of climate-related physical and transition risks. Furthermore, a requirement for much better supply chain data to measure and report buildings’ operational and embodied carbon emissions will drive changes in systems, processes, and data sharing practices across the industry. Alongside the benefits of having better information for decision-making, there will be the associated costs to obtain the necessary data to prepare reports compliant with regulatory jurisdictional rules and other standards demanded by investors and financiers, as well as other considerations and challenges to be addressed, including:

• Data and technology needed to fulfil these reporting requirements;
• Administrative and other costs;
• Reduced complexity for smaller entities;
• Training and addressing skill shortages in the market;
• Allowing adequate time to prepare for first disclosures;
• Supplementary technical guidance for practical application of disclosure standards;
• Standards harmonisation, especially of overarching accounting principles and rules, considering global versus local and cross-industry
• Other initiatives, such as setting Science-Based Targets, Net Zero Asset Managers commitment; and benchmarks, like GRESB, alignment with these reporting standards.

Eventually, this will lead more reliable information on ESG risks and opportunities.  But sustainability reporting is not the end, rather reporting acts as an enabler for a systematic improvement process, which includes setting strategy, policies and action plans based on data and analysis; and as a tool for continual performance management and review. The industry and regulators have acknowledged the need for high quality, consistent and comparable sustainability disclosures. What is less certain, whether the transition is happening fast enough to support timely delivery of net zero goals.

Further information

Contact Sarune Ringelyte or Jonathan Li

The new environmental reporting measures affecting real estate in 2023