California’s Landmark Legislation on Climate Disclosure: Driving Evolution in Real Estate Reporting
California’s Landmark Legislation on Climate Disclosure to Drive Evolution in Real Estate Reporting
California’s recent landmark legislation on climate disclosure, passed in fall 2023, is set to revolutionize real estate reporting on climate risk and provide unprecedented public insight into the industry’s impact on climate change. The two laws, SB 253 and SB 261, mandate large public and private companies in California to report their total greenhouse gas emissions and the effects of climate change on their financial performance.
While these laws specifically apply to companies operating in California with annual revenues exceeding $1 billion and $500 million, respectively, the state’s significant economic influence suggests that climate risk reporting will likely become a standard practice. This legislation aligns with existing disclosure requirements in Europe and upcoming rules by the U.S. Securities and Exchange Commission, positioning California at the forefront of climate risk reporting.
As companies gear up for reporting in 2026, those that proactively develop strategies to accurately measure and reduce their emissions and climate-related financial risks will have a competitive edge in compliance and market advantage.
The Growth in Climate Risk Disclosure
Many leading real estate firms have been proactively assessing and reporting their carbon emissions and climate impacts for years, aiming to reduce the industry’s substantial contribution to global emissions. The introduction of frameworks like the Sustainable Finance Disclosure Regulation in Europe and the Task Force on Climate-related Financial Disclosures has accelerated this practice, guiding companies on how to disclose their climate impact for stakeholders to understand better.
The number of companies reporting environmental performance data to organizations like CDP and GRESB has surged in recent years, indicating a growing commitment to sustainability. California’s new laws reinforce the importance of accurate data on climate risks and strategies to mitigate them for companies to remain competitive in today’s market.
Understanding the New Laws
SB 253 and SB 261 require companies to disclose their Scope 1, 2, and 3 emissions, as well as climate-related financial risks and mitigation actions. Scope 1 emissions stem from direct fossil fuel use in assets, while Scope 2 emissions result from grid electricity use. Scope 3 emissions, the largest share in real estate, include tenant energy use and embodied carbon from building materials.
SB 261 mandates companies to report climate-related financial risks, following frameworks like TCFD, to address transition and physical risks. These disclosures will provide stakeholders with valuable insights into real estate assets’ exposure to climate risk and highlight companies taking meaningful action to enhance value.
Differences from the SEC Proposal
California’s laws go beyond the SEC proposal by requiring Scope 3 emissions reporting, offering a comprehensive view of real estate emissions. This transparency will incentivize companies to prioritize climate action, potentially leading to financial outperformance, as seen in REITs disclosing to GRESB.
The Upshot
Climate risk is integral to real estate performance, and California’s new legislation will bring much-needed transparency to the industry. Companies prepared to manage climate risks and leverage their disclosures for better products will stand out in the market and attract future investments. The evolution in climate risk reporting will drive sustainable, resilient real estate practices, shaping the industry’s future.
