ESG Step 1: Climate Risk
Our ESG services, based on Gen 3 ESG principles1, have a laser focus on producing ESG outcomes simultaneously to building investment outcomes. As illustrated in our E10A ESG Outcome Targets© illustration below, used correctly, your ESG program should not be a cost or reporting center, nor should its primary focus be to rack up building certifications. A productive ESG program should aim to 1) create real ESG results that are specific to and achievable by your business and 2) support and enhance your investment objectives. These may be ESG goals such as reducing utilities or emissions, creating healthier interior and exterior environments, supporting diversity, equity and inclusion or other goals that are complementary to your investment strategy and internal and external stakeholder goals. Simultaneously, your ESG goals should support and expand your investment strategy. This could occur for example by implementing ESG programs that reduce expenses and/or risks or increase revenues and/or capital raising efforts.
A good first step to start building your ESG program is to focus on climate risk.
It doesn’t matter whether you believe in climate change. Climate risk is important because that is by far the number one ESG factor that regulators are focusing on and it is your biggest ESG legal risk as well2. So, this is not a climate change debate - this is a very important risk management exercise that you should be undertaking to manage your investment, legal and insurance risks, regardless of any other
ESG efforts you may or may not be undertaking.
We suggest as a first step to run a TCFD type workshop. TCFD is the Task Force for Climate-Related Financial Disclosures, created by the Financial Stability Board which is an international organization organized by the G20 to promote international financial stability by coordinating national financial authorities and international standard-setting bodies towards development of strong regulatory, supervisory and other financial sector policies. TCFD is important in the world of ESG because the TCFD guidelines are consistently referenced by many other ESG frameworks.
In the US, TCFD is a focus of The Financial Stability Oversight Council (FSOC) - a government organization that was established under the Dodd-Frank Wall Street Reform and Consumer Protection Act to provide comprehensive monitoring and multi-disciplinary risk analysis of the stability of our nation's financial system. FSOC brings together the expertise of federal financial regulators, state regulators, and an independent insurance expert appointed by the President. Its members include the SEC, FDIC, FHFA, and the Federal Insurance Office. Thus, the real estate industry should expect to continue seeing some consistent guidance regarding climate disclosure among lending, insurance and compliance regulators.
In October of 2021, the FSOC released a report that identified climate change as an emerging and increasing threat to U.S. financial stability. Real estate companies should be planning to operate under potential regulatory revisions as the report asks member agencies to:
- Assess climate-related financial risks to financial stability, including through scenario analysis; - Enhance climate-related disclosures;
- Enhance actionable climate-related data;
- Build capacity and expertise to ensure that climate-related financial risks are identified and managed.
Climate-related risks are also under review by FSOC members and other national regulatory agencies including the Federal Reserve, the SEC, the Federal Insurance Office (FIO), and the Department of Labor which manages ERISA.
While ESG regulations will likely take a “two-steps forward, one-step back” progression through changes in US political regimes, climate risk modeling is likely here to stay. The good news is that integrating climate risk into your investment and strategy planning does not require a huge property-level software roll out. A good starting place is to conduct a scenario analysis as suggested by TCFD, the results of which should be integrated into your analysis and planning processes as prescribed by multiple ESG frameworks.
For further information, contact:
Paige Mueller Catherine A. Marshall
310-923-2909 416-839-7773