Our industry is engaged in an important dialogue to improve sustainability through ESG transparency and industry collaboration. This article is a contribution to this larger conversation and does not necessarily reflect GRESB’s position.
In the ever-evolving landscape of real estate, regulatory compliance stands as a pivotal factor determining the success and sustainability of ventures within the industry. The range of policy – either in place or in development – is wider than ever before. From disclosure regulations to stringent building standards, real estate professionals must navigate a complex web of rules and guidelines to ensure their projects meet legal requirements, while aligning with broader societal and environmental goals as well as business plans. Let’s delve into the significance of regulatory compliance and alignment in real estate and the strategies for effectively managing these challenges.
Global context and recent updates
EU regulatory tools are mostly directives which provide frameworks and high-level requirements for member states to follow, but which leave room for each country to set their own methodologies and limits. This leads to very heterogenous implementation and ambitions between member states. One of the main goals of the recent Energy Performance of Buildings Directive (EPBD) revisions is to harmonize measures across the EU and ensure the level of commitment is aligned with the Net Zero Carbon commitment.
In the US, climate zones, building codes, energy markets, and compliance requirements all vary per state and/or region, with city- and state-level regulation leading the way. But the US no longer only offers sticks. It now has some of the largest carrots in history and the Inflation Reduction Act, in particular, is designed to accelerate the private sector towards decarbonizing the US economy.
The US is also looking to increase transparency: the SEC’s new climate disclosure rules may require companies to disclose climate-related risks that could materially impact their business or financial statements. This represents a significant change in disclosure requirements for US firms regarding climate change. These rules complement existing regulations, like Europe’s Corporate Sustainability Reporting Directive (CSRD), Sustainable Finance Disclosure Regulation (SFDR) for green finance, and California’s disclosure requirements, all of which emphasize the need for comprehensive sustainability disclosures in response to increasing demands for transparency on ESG matters.
Key considerations and challenges
Navigating complex regulatory frameworks: Real estate developers and investors must contend with a myriad of regulations that vary by location and project type, covering a broad spectrum: reporting and disclosure, building codes, benchmarking programs, carbon emission taxes, and more. Staying abreast of these regulations and understanding how they intersect is crucial for ensuring compliance. Failure to comply with these regulations can lead to severe consequences, such as fines, project delays, litigation, or even project abandonment.
Political uncertainty: The ongoing wars in Israel and Ukraine will continue to draw resources and focus away from low carbon policies. This is exacerbated by political will continuing to wane regarding climate action, and by weak policy signals. Further exacerbating this is a high level of uncertainty of policy direction with US and Indian elections – the latter of which already has conservative climate targets.
Integrating requirements into business planning: Climate regulations are a major driver of action for decarbonization, especially in markets that have enacted more stringent and advanced laws. Annual energy benchmarking laws, energy auditing requirements, building performance standards, carbon emissions limits and taxes, and advanced construction and energy codes all impact the asset decisions and capex allocation planning. Making sure the required upgrades or penalty risks are integrated into financial planning is a key step for alignment.
Community engagement and stakeholder management: Many climate regulations impact several stakeholders during the asset life cycle, often both landlords and tenants. Alignment and compliance require communication and engagement to ensure data is shared adequately, goals are understood, and appropriate interventions implemented.
Data availability: Investors need robust and reliable climate data – both to credibly report on and to comply with regulations requirements – such as energy data and carbon emissions data, but also wider climate metrics. However, there are gaps in the data currently available, and accessing the necessary data for your buildings can be a challenge, especially around tenant data and Scope 3 emissions.
Strategies for success
Proactive compliance management: Establishing a comprehensive compliance management framework that includes regular policies updates, staff training, and clear protocols for identifying and addressing compliance issues, can all help minimize the risk of non-compliance.
Holistic approach to alignment: Integrate sustainability and social responsibility considerations, as well as compliance alignment, into all stages of real estate development, from site selection and design to construction and operation.
Data collection strategy: Work with a data partner who can make sure that your building data is easily accessible, quality-assured, and traceable back to the source. Having access to the necessary data, and being able to show how the data was obtained, is necessary to comply with regulation – both in terms of reporting and to improve operations.
Conclusion
In the dynamic world of real estate, regulatory compliance and alignment are critical imperatives for success. By understanding and proactively managing regulatory requirements, while also aligning with broader societal and environmental goals, real estate professionals can create sustainable and resilient assets that benefit communities and stakeholders alike. Embracing a holistic approach to compliance and alignment not only mitigates risks but also unlocks opportunities for innovation and long-term value creation in the real estate sector.
This article was written by Marianne Fabius, Managing Consultant at EVORA Global.