As outlined in the latest IPCC synthesis report, decarbonization is more than just a critical priority in 2023—it’s key to securing a sustainable future, and our actions in the next few years to mitigate and draw down emissions will be pivotal. Thankfully, climate action on the policy and business agenda continues to gain momentum, with several key areas of focus on the immediate horizon.
To stay ahead of what’s next in carbon, here we begin with global and regional trends, then explore trends happening at the local level.
#1: CLIMATE REGULATION IS HERE
In our trends blog last year, we mentioned increased regulatory pressure for companies to report climate-related metrics. That momentum has continued, and regulation is now a near-term certainty. Last March, the SEC proposed new climate rules that would require registrants to report greenhouse gas (GHG) emissions and climate-related financial risks, among other metrics. Since the proposed rules were released, more than 14,000 comment letters have been submitted to the SEC, and companies have begun implementing the systems needed to support audited reporting. While the final rules and the timeline for their release and adoption are not definitive, SEC registrants can anticipate complying with these disclosures in the next two years.
Abroad, in January of 2023, the EU’s Corporate Sustainability Reporting Directive (CSRD) entered into force, extending sustainability disclosures to a broader set of companies that will need to comply for reports published in 2025. The CSRD encompasses a significantly broader range of sustainability metrics—not only climate-related metrics—and is more prescriptive and rigorous than the proposed SEC rules. CSRD will impact EU-based companies as well as non-EU-based companies with significant business in the EU.
In addition to requiring disclosure of GHG emissions, regulation is motivating companies to expand their understanding of climate risk and to pursue the data and analyses needed to quantify the financial impacts of climate-related risks and opportunities to their business. Both the SEC and CSRD, as well as regulation in other jurisdictions and reporting standards developed by organizations such as the International Sustainability Standards Board (ISSB), align closely with the reporting recommendations developed by the Task Force on Climate-Related Financial Disclosure (TCFD). The number of companies developing disclosures in line with TCFD recommendations has grown steadily since TCFD’s release in 2017; however, we can expect to see a significant increase in adoption in 2023 and the years ahead as climate disclosure regulation takes effect and investors and lenders increasingly leverage risk disclosures in their decision-making.
#2: DATA MANAGEMENT SYSTEMS ARE A MUST
In the quickly evolving landscape of climate disclosure, companies are being asked to disclose more climate-related metrics of increasing complexity and trustworthiness. Companies are also expected to use these metrics to make decisions and drive improved performance over time. Due in large part to the voluntary nature of climate reporting, many companies have not traditionally prioritized investments in environmental management systems and data improvement. With regulation on the horizon, companies are now prioritizing data collection and management systems at a pace never seen, as evidenced by the rapid growth in sustainability software platforms and their adoption in 2022 and early 2023. In a recent Deloitte survey of finance, accounting, sustainability, and legal executives at U.S. public companies, more than half identified data availability, accuracy, and completeness as their greatest challenges with respect to ESG disclosure.
#3: ANTICIPATE A NEW GLOBAL STANDARD FOR REAL ESTATE PORTFOLIO GHG TARGETS
Since 2021, the Science-based Targets Initiative (SBTi) has been facilitating a collaborative effort to develop sector-specific guidance around 1.5 degree C aligned emissions reduction targets for buildings. The guidance aims to address both embodied and use-phase emissions, alongside guidance on emissions accounting and target-setting. At this time, SBTi is seen as the leading independent voice on corporate climate targets across many industries. With the addition of sector-specific guidance that better addresses some of the challenges developers and owners/operators face, we anticipate wider adoption by the real estate sector of portfolio-wide reduction targets in 2023 and beyond. Preliminary guidance is anticipated in May 2023 with final guidance released before year end. Stok’s Carbon Services team will be reviewing and providing feedback to SBTi on the preliminary guidance when it is released.
#4: BIODIVERSITY EFFORTS WILL BE ELEVATED ALONGSIDE CARBON
In December 2022, the United Nations Biodiversity Conference (COP15) concluded with the landmark Kunming-Montreal Global Biodiversity Framework. The Framework’s objective is to halt and reverse human-induced biodiversity loss by 2030 through the global pursuit of four ambitious goals and 23 action-oriented targets. While many initiatives were already in process, the signing of the Framework has served to raise the profile of biodiversity in the policy arena and private sector. New anti-deforestation regulation in the EU looks to tackle both climate change and biodiversity, while initiatives such as BiodiverCities aim to support city governments, businesses, and citizens to better integrate biodiversity into urban planning and resiliency efforts. Building developers can anticipate greater interest and/or local code requirements around green design concepts that protect and/or enhance the local ecosystem.
The market for carbon credits continues to grow rapidly, with increased focus on nature-based solutions that deliver ecosystem benefits beyond carbon avoidance, reduction, and removal. In 2023, we can expect to see increased efforts to improve the quality and transparency of credits in the voluntary carbon market (VCM), as well as similar efforts to begin to define rules and standards for an emerging biodiversity credit, or biocredit, market.
#5: LOCAL BUILDING CODES MOVE TOWARD NET ZERO
Building codes in many jurisdictions are becoming more rigorous and ambitious, with a focus on achieving lower embodied and operational footprints. In New York, Local Law 97 requires most buildings more than 25,000 square feet to meet meaningful efficiency and greenhouse gas limits by 2024, making 2023 a critical year of action for building owners and operators. On the development side, West Coast developers must prepare for California’s state law AB 2446 (Carbon Intensity of Construction and Building Materials Act), the passage of which in late 2022 exemplifies the movement toward more prescriptive climate measures for building design and materials selection. In Toronto, Version 4 of the Toronto Green Standard (TGS), which took effect midway through 2022, places a greater emphasis on emissions from new construction, and requires all newly constructed City buildings to be net zero. Studies currently underway will inform potential future requirements for embodied carbon to be incorporated on a broader scale in the years to come. Building developers, owners, and operators who address this legislation proactively are likely to be better positioned as local codes become more rigorous and prescriptive and expand in future years to incorporate other initiatives on the policy agenda such as biodiversity.
While these trends may feel daunting, they also present substantial opportunity for environmental and financial impact. Moreover, immediate action at scale across all areas will be critical to protect the future of the planet. Reach out to the Stok team to discuss how your organization can level up your decarbonization initiatives to position your assets for the future, contribute to a sustainable future for all, and get ahead of what’s to come in the carbon space.
