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Regulatory Landscape

Published on 28 March 2022

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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.

Intro

The regulatory landscape surrounding climate change and Environmental, Social, and Governance (ESG) issues remains in a constant state of evolution in the United States. The US continues to lag behind the rest of the European Union (EU) by an estimated 10 to 15 years on climate change goals. With the 2022 midterms around the corner, we expect little change from the federal side on regulation given the current makeup of the senate with 50 republicans, 48 democrats, and two independents. This leaves the burden of adopting climate-related legislation to state and municipal-level governments. It will be necessary for organizations going forward to remain agile in their ability to conform and adapt to the ever-changing regulatory environment and ensure that climate-related legislation reviews are a routine part of an organization’s operations.

Federal

Investors and regulators are increasingly focused on ESG disclosures. Notably, SEC Chairman Gary Gensler stated in July 2021 that climate risk disclosures should not only be mandatory but be disclosed in a way that is consistent and comparable to other companies. This would allow investors to make informed decisions when comparing companies and look at how a company has performed over an extended period concerning climate change disclosures. Public disclosures are not new in the US, but House Bill H.R.1187 exemplifies the difficulties in changing the regulatory environment at the federal level. Passed in the House, H.R.1187 aims to increase companies’ requirements to disclose their ESG metrics, including climate risk, Greenhouse Gas emissions (GHG), and board and executive diversity. However, it is unlikely to pass in the Senate with republicans having a narrow majority of two seats, passing what is considered controversial legislation will be nearly impossible. In addition, the president’s party typically loses in the midterms, which could lead to the loss of the majority in the House of Representatives as well.

Washington State

With little direction from the federal level, ambitious plans are being developed and adopted by state and municipal governments to take a stand on climate change. Eight states are committed to carbon-free electricity. In addition, two states plus Washington D.C and Puerto Rico, are committed to 100% renewable electricity. The Pacific Northwest has emerged as a leader in climate regulation; as early as 2010, the Swinomish Tribe was the first in the nation to publish a climate action plan (CAP). Since then, several of Washington’s local governments have taken a similar approach in adopting CAPs and accompanying regulations to accelerate the positive impacts of reducing GHG emissions and moving towards a more energy-efficient future.

In the 2022 legislative session, Washington State is looking to add to the regulatory landscape by adding policies that further protect the environment. One example is the Net-Zero Ready Building Code that would help Washington meet its GHG reduction targets by requiring any new building constructed in 2034 or later to only use electric appliances and heating systems, have the capacity for electric vehicle (EV) charging, and be wired for solar panels. The Washington Clean Buildings Act of 2019 requires the state Department of Commerce to set the energy performance standards for any building over 50,000 square feet. Governor Jay Inslee’s newest proposal would also require new standards and regulations for buildings that fall between 20,000 and 49,999 square feet.

The Washington State Building Code Council is also looking to impact the local regulatory environment. Currently, it has two proposals under consideration that would require high-efficiency electric equipment for space and water heating in all new commercial buildings in their 2022 Washington State Energy Codes. Crucially, RCW 19.27A.020 already requires builders to “Construct increasingly energy-efficient homes and buildings that help achieve the broader goal of building zero fossil-fuel greenhouse gas emission homes and buildings by the year 2031.” The impacts of taking a first-mover approach from the local regulatory standpoint are astounding. A recent study by RMI, an independent, non-partisan, and non-profit organization focused on clean energy, found that adopting new energy-efficient requirements by 2022, as opposed to waiting until the 2031 law takes effect, would result in a reduction of 8.1 million tons of CO2 by 2050. Waiting until 2031 to implement the new codes would also cut the 2050 emissions savings by half.

The Net-Zero Ready Building Code for Washington State is an excellent step in the right direction; the use of local building codes has become a powerful resource in the regulatory landscape to help fast-track the transition. The cities of Shoreline, Seattle, and Tacoma have already amended their building codes to stop the installation of natural gas hookups on all new commercial buildings. King County, Olympia, and Bellingham are also looking to update their local ordinances to expedite the transition away from fossil fuel instead of waiting until 2034 for the Net Zero Building Code to take effect at the state level.

Conclusion

Firms with international exposure have already experienced the increasing complexity across the global regulatory environment. Similar complexities are unfolding at the state level as state and local governments take a proactive approach to regulation, utilizing building codes as a tool for meeting climate goals. A robust regulatory review process to help drive organizational and ESG strategy will become increasingly important as state and local climate regulations continue to develop.

For more insight into legislation trends around the globe, please reach out to our regulation advisory team at Longevity Partners ([email protected]).

This article was written by Ted Stadtmueller, Business Growth Associate at Longevity Partners

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