SEC Climate Disclosure Ruling – Scope 3. A Missed Opportunity

Just when it seemed the Securities and Exchange Commission (SEC) had gone cold on their draft climate-related disclosure rule, it has been resurrected, albeit somewhat milder than initially touted . The exclusion of mandatory reporting of Scope 3 emissions (those associated with a firm’s value chain) is a significant step down from the original text – but what impact does this have for commercial real estate (CRE)? It is certainly a missed opportunity and one that puts the SEC at odds with other major jurisdictions and regulators, including those in Europe, Japan, Canada, and China .

The SEC ruling has direct requirements for approximately 40% of 7,000 US filers (which includes REITs), whereas Europe’s Corporate Sustainability Reporting Directive (CSRD) requires both public and private market participants within scope to disclose greenhouse gas (GHG) emissions across Scopes 1, 2, and 3 (where material). CSRD is expected to impact approximately 50,000 businesses, including at least 10,000 non-EU firms, of which about a third are in the US . Equally, the leading state in US Climate policy – California – has also adopted a bold approach in recognition of the impact climate change is having on businesses, residents, and communities in the state. Two policy instruments (SB 253 on GHG reporting) and its partner act (SB261 on climate risk reporting) have been put into law and are expected to impact approximately 5,500 and 10,000 companies, respectively, that “do business” in California.

In rescinding mandatory Scope 3 disclosure requirements, the SEC is going against the grain of climate reporting, however, the step-down may reduce the risk of challenges in court once the rules are formally introduced

The Challenge of Scope 3 Emissions

The inclusion of requirements to disclosure, and eventually assure, Scope 3 emissions was one of the most contentious points of the SEC draft ruling. For real estate, material Scope 3 emissions typically relate to downstream impacts from tenant energy use within leased buildings (GHG Protocol Category 13 ), and upstream embodied emissions related to the purchase of capital good for construction and development of buildings (GHG Protocol Category 2). The reporting concern was understandable for several reasons.

1. There is generally a lack of direct control on Scope 3 emissions – for example, a resident in a multifamily building or a blue-chip corporate in an office – may contract directly with an energy supplier. This makes data access challenging. ?
2. The magnitude of Scope 3 emissions is typically far larger than Scopes 1 and 2 – up to 80% of total emissions in some instances. Without adequate data management strategies, this can become burdensome to obtain.??
3. Resulting from each of the above points – the lack of control and the scale – there are genuine fears on accuracy and the potential repercussions of misrepresentation.

Misalignment with SEC Mission

Aside from being a missed opportunity, the decision is at odds with the SEC's mission; to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. Climate risk is accepted as an investment risk . Removing a requirement to disclosure Scope 3 restricts investors from gaining full insight on inherent risks within their portfolios. Considering how the GHG Protocol classifies financed emissions, the SEC ruling has very significant impacts for CRE, and other asset classes. Category 15 of the GHG Protocol classifies investment emissions as Scope 3. Whereas a CRE landlord may consider the natural gas used within on-site boilers and procured electricity contracts as Scope 1 and 2, their Limited Partner investors will consider it all as Scope 3. Similar scenarios are seen within complex fund structures where real estate forms part of a broader investment strategy under a parent holding. As these financed emissions move through capital markets, a huge swath of emissions may go under-reported if markets follow the SEC rules.

Similarly, the Final Rules require firms to report Scope 3 emissions if they are part of a transition (decarbonization) strategy. This clause may result in firms seeking to bypass this requirement by focusing only on Scope 1 and 2 transition plans. EVORA Global has heard directly from several CRE institutions that the SEC decision will weaken momentum on reporting and, importantly, action. ?

What Should be Done?

From our perspective, having climate-related data available is table stakes for many leading investors, so not being able to disclose this information may cause challenges for US firms working with global capital markets. Further, we see many cases of investors circumventing mandatory disclosure rules by demanding GHG reporting from their investment manager across Scope 1 to 3. This is a trend that will not lessen as many readers will know.? ?

Firms that have taken steps to obtain this information can directly feed it into investment decision-making processes to better understand and manage risk within their portfolios. That is the fundamental point of climate-related legislation – to prepare businesses for future risks. For example, funds with data can:??

• Identify assets that are poorly performing or running with high costs.??
• Plan for current and future building performance standards and carbon taxes, including capex planning and disposition options.??
• Benchmark performance and start to reduce emissions.??
• Satisfy investor preferences for disclosure.

At EVORA, we know that carbon performance is impacting value drivers, including investor and tenant preferences – having visibility into this information is vital for managers to make the right call on investments.?

For those who don’t have a coherent data strategy in place, we recommend the following: ?

• Evaluate current data availability and pinpoint any gaps in your data collection and management procedures.?
• Introduce data collection systems such as EVORA Managed Data Services to gather emissions data from utility providers, tenants, and suppliers.?
• Invest in data management tools like SIERA to facilitate streamlined data collection, analysis, and reporting of emissions data.?
• Engage with stakeholders, including investors and tenants, to encourage collaboration in data collection efforts.??
• Report on emissions data to both internal and external stakeholders.?
• Monitor and assess data collection processes to ensure they meet stakeholder expectations and enable well-informed investment decisions.?

Firms shouldn’t be complacent and see this as something to address in 2026. This demands immediate planning and action.??

If you would like support navigating the evolving landscape of climate-related regulations, please reach out to our experts .

Ed Gabbitas , Executive Director, EVORA Global