Earlier this year, the Securities and Exchange Commission (SEC) proposed ESG-related rule changes that would require registrants (aka public businesses) to include certain climate-related disclosures in their registration statements and periodic reports, including information about climate-related risks that are “reasonably likely to have a material impact on their business, results of operations, or financial condition.”
FinLedger spoke with Jason Stanley, Head of Insights at location intelligence company Local Logic, about the SEC proposal and what it would mean for the real estate industry at large.
Q: First off, could you describe Local Logic and the services you offer?
A: Local Logic is a location intelligence company. We quantify everything outside the four walls of a real estate asset. And what we mean by that is, we’re quantifying attributes about the neighborhood, the community access to infrastructure, transportation, the livability of a community to wellness and things like that. We use that information, those insights, to help people who are making big decisions about what to build, where to build it and where to move. So that could be homeowners, it can be office tenants, it can be real estate developers, or it could be big asset managers holding big real estate portfolios. All of whom are making these decisions about real estate at the end of the day.
Q: Can you go into a little detail about your role and what that entails?
A: I’m Head of Insights. Insights includes product experimentation and discovery on the one hand, and data science R&D on the other hand, so we’re helping to plow forward to think about where our products need to be moving over the next year or two. We’re obviously working in partnership with other people in the company, which is getting us into areas where we are not yet active, but we have data, products and insights that would allow us to become active and at the same time we’re doing R&D. All of the massive troves of data that we have to see what we can produce that’s valuable to people making these real estate decisions.
Q: What would you say is something that looking at down the road will be more important moving forward?
A: ESG and climate risk reporting, which we’re going to talk about are by far and away the biggest things that are impacting the sector right now. We have some early leaders that are starting to report, but most of the industry is not doing much at all right now. And even the ones that are leading, are doing it at a pretty superficial level. Just to respond to the SEC proposal everyone, including the leading actors, are going to have to up their game considerably. It’s a big ask.
I think there’s some other really interesting things happening. I’m interested in tokenization and how the blockchain is going to create new investment opportunities, especially for retail investors.
I think migration to the Sunbelt, which has been a big story that people have been talking about is really interesting, in large part because of the climate angle on this. Florida is getting massive immigration, and it also happens to be one of the most risky climate places to live in the world. Maybe not the world, but at least in the United States. So what’s going on there, right? You have all these people flooding in, and all this money flooding into real estate and occupancy in a state that’s facing huge climate risks. Will the increasing transparency about climate risks that’s going to come out of this SEC stuff affect that? Is that going to start helping people wake up, at least the big banks and the big actors who are financing a lot of that activity through mortgages, underwriting and big loans? I’m interested to see how that’s all gonna play out, because it seems like there’s a bit of a collision waiting to happen there.
Q: Let’s talk about this proposed rule change. What are your thoughts? What is this going to mean for businesses if it goes through?
A: Great question. This represents a massive step forward for the U.S. industry in general, in terms of reporting on risks that are real. That we know are real and that are coming in, providing transparency for investors and so on. We’re catching up to lots of other parts of the world. I’m actually in Montreal, so I’m technically outside of the jurisdiction, but in Northern America we’re catching up to stuff that’s been happening elsewhere in the world and particularly in Europe.
They’re ahead of the game, but it’s certainly not too late. We have a massive hill to climb in terms of catching up globally to what we need to do to prepare for climate change, like drawing down emissions and preparing for what’s coming. But it’s not too late, and it’s a great step forward.
It’s going to have the immediate impact of forcing publicly traded companies and then all of the things that they touch in their supply chain, which is well outside of public markets, to start reporting and to give transparency to investors on where big climate risks are and emissions risks are. For me that’s massive. It’s certainly not the last thing we’ll need to do. There’s lots more to do, but it is a really big and important step forward. For the country and for real estate and for investors.
Q: What are the most important metrics when it comes to this and what do you really think needs to be addressed and made part of the actual proposal?
A: The proposal kind of breaks down on two sides. One is climate risk, which we can think of in terms of physical risks. That’s storms, floods, fires and so on. Then there’s transition risks, which are risks coming from regulation. Let’s say governments start to require buildings to be more energy efficient, or they require they put in place congestion pricing, which impacts how often people will drive or they put in a carbon price. Those things can disrupt business models and all these things. So there’s that side, and then there’s the emission side which is letting everyone know how much energy and how much greenhouse gas emissions is being produced by your activities.
These kinds of join at the end of the day, because governments are starting to put in place regulation to limit emissions and so on. I think these are two really key sides to the equation. I think there’s a couple of things that risk being left out, that if I had my magic wand I’d love to see in there.
First, I think when you see what people are talking about in response to the proposal, people are mostly talking about the climate and physical risk side of things. We need to run around, we need to figure out, ‘Are we in a floodplain? Are we at storm risk? What does our portfolio look like?’ People are talking much less about this transition risk side of things. Unsurprisingly, it’s really complicated and hard, and you kind of almost need to have an internal strategy and risk team for doing constant scanning of the horizon, but that’s what it comes down to. That’s really important, because the SEC proposal requires companies to put in place those kinds of analysis, monitoring and governance structures to make sure that they’re actually doing that on an ongoing basis. That’s not really being talked about very much right now, but it’s in the proposal. I think that’s going to hit people over the head when they realize what kind of obligation that requires them to do.
They’re going to have to build teams internally, or they’re going to go out and spend a lot of money to get some third party to do it for them. That’s not me saying it should be added. It’s already in there, it’s just not being really talked about and it’s much bigger than simply finding out if you’re in a floodplain. You have to try and figure out, how will the world change over the next 10 to 20 years? Is this going to disrupt my business model? Am I going to lose my customer base or am I not going to be able to attract talent anymore, because no one’s going to want to live in the region I’m in? Those are really big and hairy questions, and people are going to have to start doing them. That’s the first one.
Secondly, on emissions. You’ve probably heard that they’re adopting this greenhouse gas framework of scopes, one, two and three scope. One is your direct emissions. Two is through electricity and energy and cooling and so on. Then, scope three is this big area that people all say that’s where most of the emissions are, but it’s also really complicated because it’s supply chain and value chain stuff. So what they chose to do was say, “Okay, look, scope one and two is the easiest, so we’re going to require everyone to do those and Scope Three only if it’s material.” I understand why they did that, because it’s hard for people to do Scope Three, but really what they’re defaulting to is they’re saying, “What we want to do is we want to make sure that people are doing the easiest stuff first.” The alternative could have been we want people to do what’s most impactful first. So maybe if a company is going to invest X dollars or X amount of time in this climate risk disclosure stuff, and they have a limited budget of time and money, is it worth it for them to focus on things that in some cases are going to be not so meaningful, or to the things where they could be really meaningful?
For some companies, the most meaningful stuff is actually out there in the blurry Scope Three world, probably for lots of companies, and trying to organize their activities so that they can try to influence those things could potentially be much more impactful. Maybe they would have only a reduced impact, like they wouldn’t be able to stop something 100%. But maybe you have only like a five to 10% impact, but if that’s a huge thing, five to 10% could actually still be really meaningful, right? I think that’s kind of an unfortunate aspect of the whole discussion right now, that we focus so much on what do you own? It’s a bit almost like GDP accounting or something like that. We have to be able to classify things into people’s own gardens rather than kind of embracing the fact that, you know what? Stuff is really messy, and maybe you don’t own the thing that you have the most influence over and can make the most impact on, but that’s okay.
We can try and hold you accountable for you having an influence over your supplier or your buyer. Even if we know you’re not going to be able to fully influence them, and maybe that’s the most meaningful thing. I think that’s something that needs to get talked about more. This difference between accounting taxonomic clean cleanliness if you will, on the one hand, and impact on the other.
Q: What have you seen as far as knowledge and willingness to do this? Especially when it does come down to that third scope, are people are of that or do they just not want to be aware?
A: Yeah so it’s interesting in real estate, because what everyone talks about through the lens of real estate is operational efficiency. Buildings have to track systems like electricity systems and cooling systems and they use so much electricity. You can make them more efficient over time. And then the second thing they like to talk about is building materials. Incidentally, both of these things are usually Scope Three things. They’re not scopes one or two, why? Because if you’re a developer, those building supplies you buy them from someone else. So they’re not part of your [direct] scope, but they’re part of your supply chain, you buy them.
And if you’re a developer who is using the electricity in the building, almost certainly not you, it’s the tenants. It’s the buyers or the occupiers of this asset, which you may not even own a year later. Nevertheless, they’re taking actions to influence their supply chain upstream and they’re taking actions to influence the structure and the kinds of decisions that tenants can take downstream by installing things like green HVACs other installation decisions. What’s funny is that we love to talk about Scope One and Two as where we need to focus our efforts, but you find in real estate that where they actually do most of their stuff is Scope Three. Because they realize there are big gains.
Now unfortunately, they don’t go beyond those two things. They don’t go beyond energy efficiency and units in the building and supplies. They’re this other big area which I’d like to talk about, which is where you build and what you build influences how people move around. For example, if you build a shopping mall, guess what’s going to happen? People are going to drive to and from that thing, and you’re probably going to put it outside the city core. If you replace that shopping mall with a mixed-use dense neighborhood, guess what’s going to happen? People are going to use cars less often. You don’t need to be a rocket scientist to get that, right? People know it and developers know it, but people are not talking about it from an emissions perspective.
They think “Transportation? Oh, that’s the car companies. We do buildings.” But everyone knows buildings influence where things thrive or not. It’s a bit of a crazy conversation where everyone has kind of agreed to focus on their own little yard, without recognizing that there’s this really intense connection in where and how we build cities and how that influences how people move around. We’re trying to convince the industry that there’s this big opportunity and risk of not addressing that your tenants, occupants or residents are eventually going to be hit with regulation. And around car driving, it’s coming. That’s going to influence whether people want to live in your property if you’re in a place that’s super car dependent. It’s a risk like any other risk, and you have got to be paying attention to it, but people are kind of ignoring that right now.
Q: I’m thinking about the amount of data that this reporting would bring in. How does that affect how you look at the proposal overall?
A: The proposal is going to create lots of data about climate risk, it’s going to create data about emissions. My guess is that the emissions data is mostly going to influence a couple of things. One, there’s some buildings that are beyond saving. They’re just not going to become energy efficient buildings, they’re old or they’re Class C or whatever. There’s going to be some shakeout that’s going to happen, where low quality old buildings and infrastructure, also very risky places like Miami, over time we’re going to see that stuff get penalized. Now it might not mean mass outward migration, it might come in form of higher rates to get loans, harder to get insurance, and marginally that’s going to push people out of those areas. I think and into safer and greener assets. You’re going to see an increase in demand for green, newer energy efficient buildings. I think we already know those things have a premium, but I think it’s going to increase and I think probably you’re going to see us something else on my mind.
You’re going to see companies have this messy interaction where the transition risk stuff is going to be worked out over time. It’s probably not going to be right away, but investors are going to wake up a bit more to the big messy transition questions like Houston. What happens to Houston? Houston is a big oil town and, it’s not going to go away, especially now with what we’re seeing with the national security questions around oil and so on. But in the longer term, which at the end of the day, real estate actors usually are thinking of because these buildings stick around for many decades. It’s gotta have some marginal impact, right? Houston is a big oil and gas town.
That’s not likely to survive like it’s not going to be the same in 30 or 40 years as it is today. That’s surely going to have some kind of an impact upon real estate valuation, because unless the city does something massive to diversify. I think those kinds of questions are going to come up. You have as I mentioned earlier, the Sunbelt as a whole aside from Florida has heat and drought issues, we’re going to see the number of extreme heat days in cities like Phoenix multiply right like that. Surely that’s going to have an impact on livability, wellness, health and so on.
At the same time, you have this impact of high inflation, right? Let’s say we move into an environment where inflation sticks around, potentially even stagflation-airy environment. You have all these people who’ve moved to the Sunbelt looking for cheaper places to live. Those places over time are getting less and less livable. They’re also places that are totally card dependent. What’s happens in an inflationary or stagflation environment is that people’s housing costs are going up, people’s gas prices are going up, and people are suddenly in cities where they need to use their car to do anything. That’s also super hot. My bet is that Sunbelt migration is going to reverse. It might not happen right away, but we’re going to start to see either through this data, or just through the fact the inflation and everything is going to catch up to people, and people are going to realize that the affordability difference is partly a mirage.
It’s cheaper because you don’t have access to a lot of things. So you need to use your own time rather than your money to go get the groceries, but like there’s a limit to that stuff. People are going to figure it out in the longer run that it’s not it’s not always cheaper.
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