The Securities and Exchange Commission (SEC) has proposed rules that require listed companies to disclose a broader range of climate-related risks and impacts.
Although ESG initiatives are typically implemented by sustainability professionals, this new framework requires the C-suite to better understand the costs and rewards of different approaches to reducing a company’s environmental impact.
ESG solutions can be complex to implement, and results can be difficult to determine. This is one reason why “greenwashing” is so prevalent in business and why the Securities and Exchange Commission is trying to combat it with stronger standardization. Under the proposed rules, companies registered with the SEC would be required to disclose Scope 1, Scope 2 and Scope 3 emissions. Studies have found that only 32 percent of the commercial real estate industry currently reports Scope 1 and Scope 2 emissions. Meanwhile, only 14 percent of Real estate firms report Scope 3 emissions, which make up a large portion of a company’s total greenhouse gas emissions, but are difficult to identify and mitigate.
The company’s ability to quantify emissions reductions is critical to developing ESG as a core competency and source of competitive differentiation. When it comes to negotiating with purchasing officials and corporate buyers who offer premiums on ESG ratings, companies with sustainability programs have a clear advantage over those that lack such programs.
For real estate companies looking to improve or implement ESG efforts, solar energy is a straightforward, immediate, visible and economically viable solution. Solar energy is an essential decarbonization solution with real, measurable results. Switching to solar energy immediately reduces reliance on fossil fuels and can offset up to 100 percent of a property’s electricity use. In addition, solar energy projects are relatively easy to implement and do not require behavioral changes within the organization. Solar power is now the cheapest way in history to build new electricity generation, making it a cost-effective way to implement ESG initiatives.
Solar energy offers a range of financial and operational benefits to companies of all sizes, particularly in countries with renewable energy incentives or climate targets. Businesses can also claim 26 percent of the costs of solar projects against federal income taxes through the Federal Solar Investment Tax Credit (ITC).
Moreover, interest rates tend to fluctuate and rise. By investing in solar energy, companies can maintain low, predictable electricity rates for decades, resulting in significant operational savings. Solar power combined with battery storage can also reduce downtime, which is more frequent due to severe weather. In addition, solar energy can increase property values without changing the structure of the building.
Fortunately, investing in solar energy has never been easier. Over the past several years, a variety of increasingly sophisticated financing structures have been developed to meet almost any business objective. Companies can determine which one best suits their needs by analyzing their tax appetite, access to capital and credit rating.
If the company has a moderate to significant tax appetite, you will want to consider a cash purchase, bank loan, property-assessed clean energy loan (PACE), or a structured solution with a specialist financing company. In each case, the company owns the solar system and can recover the associated tax benefits.
For companies that do not have a tax appetite, but have good credit or can have an investment-grade entity, that offer a guarantee, opting for an operating lease or a power purchase agreement (PPA) are great alternatives. Through these financing structures, an outside developer owns the system on the company’s property and sells the energy to it at a discount compared to utility rates.
Representing 21 percent of global greenhouse gas emissions, the commercial real estate industry must play an active role in tackling climate change while maintaining its position as a safe and profitable asset class. Besides the proposed changes from the Securities and Exchange Commission, many states have already passed legislation requiring the construction of new “solar-ready” buildings, indicating that the trend toward decarbonization is here to stay. Adopting solar energy is one of the easiest and most important steps a company can take to reduce emissions while increasing competitiveness with cautious investors in this new financial landscape.
David Heyman is CEO of Safari Energy, a developer of solar energy.
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