Yes, climate change presents undeniable challenges. But, for savvy leaders and investors, it offers the opportunity to guide companies toward capitalizing on the climate economy.
ESG standard compliance will increasingly be a competitive advantage. For example, compliance with Global Real Estate Sustainability Benchmark (GRESB) standards directly contributes to significant gains in commercial real estate building occupancy, values and ROI according to ESG consulting firm Verdani Partners.
As corporate ESG initiatives get more support and funding, they’re creating evolving types of transactions that may affect lease accounting under ASC 842.
Energy service agreements (ESAs) are one such transaction that reflects the trend of incorporating ESG objectives into ongoing operations. These transactions may also require specific accounting considerations. ESAs do not appear on balance sheets as liabilities and carry additional benefits such as guaranteeing the amount of energy savings a customer will achieve over the contract term.
While tenants benefit from lower operating costs, building owners/ managers enjoy increased rent, building values, occupancy, and retention. Meanwhile, lenders lessen risk with reduced default rates and investors improve their ROI.
A 2022 study found that high ESG scores lead to lower corporate bond spreads as well as lower exposure to systemic volatility, leading to lower default risk. As a result, investors and other providers of capital are looking for ESG metrics as a critical factor for their allocation of capital
Where are you on your journey with ESG accounting standards? Just starting? Fairly well along? Either way, a complex web of regulatory frameworks is just one challenge.
Here are a few others:
What to do when investors say one thing but expect something else?
According to a recent EY Global Corporate Reporting and Institutional Investor Survey, 73% of investors say companies must enhance their ESG reporting to inform their decisions, but 53% say the short-term earning pressure from investors serves as an obstacle to their activities.
The sources for this corporate real estate ESG data – such as utility consumption, energy certificates and varying lease structures – must be consolidated, but these sources are difficult to capture and store properly. Attributes related to sustainability, risk and utility consumption must be accounted for.
Overall progress toward real estate sustainability goals, such as carbon emissions, must also be tracked. The typical tenant-landlord communication process that would yield this info requires heavy management to ensure proper data sharing.
With so many frameworks out there, many of them unverified, the integrity of ESG reporting is not absolute. Often, business owners are making pledges to be greener, without a strategy to support the work.
Instances of greenwashing – “green” marketing without proof to support claims – have risen enormously, and there is a worrying trend of funds attracting capital by drastically overstating their ESG credentials.
These disconnects have not gone unnoticed. Investors have been signaling that they want highly accurate ESG reporting. The SEC is listening. In response, they commissioned a task force in March 2021 to identify ESG-related misconduct that will audit statements in Private Placement Memorandums (PPMs).
There has also been a corresponding rise in third-party ESG audits to enhance credibility against climate-related reporting frameworks. For example, a recent Center for Audit Quality study revealed a 20 percent increase in referencing Task Force on Climate-Related Disclosures (TCFD) for S&P 500 companies’ reporting from 2020-2021 alone.
If you want to prepare even further, download the free eBook from CoStar Real Estate Manager.