Business owners increasingly understand the need to mitigate climate risk and many companies with forethought are already seizing upon the multi-trillion dollar economic opportunity that accompanies the economy’s transition to Net Zero.
Disclosing greenhouse gas emissions and reducing GHG aiming for Net Zero is not only an issue for businesses, although make no mistake it will be among the biggest business issues of the year, but it will also soon impact ‘people’ who occupy rental apartments, condominiums and the like, and in the not too distant future will impact nearly all of us.
The topic of disclosing and reducing GHG is everywhere. And yes, this is with appreciation that the subject is hierarchically a subset of environmental, the E in ESG, and then below that climate change.
The certainty that GHG reduction is the environmental issue of 2023 is more than a Magic 8 Ball prediction, although we do regularly consult one of the 1960s era plastic spheres I keep on my desk.”
If you doubt the magnitude of the issue, “net zero” was mentioned by public companies in more than 6,000 filings with the SEC in 2022. This is not irrational exuberance and the reporting in 2022 on planning for decarbonizing the economy has laid the foundation of fundamental valuation for 2023.
And that was in advance of proposed future mandates of government even going into effect. A little more than a month ago, the DOD, GSA, and NASA proposed to amend the Federal Acquisition Regulation to require certain Federal contractors disclose their GHG emissions and set science based targets to reduce their GHG emissions.
And before March when the SEC proposed rule changes that will require public companies to include climate related disclosures in their registration statements and periodic reports, including disclosure of a business’ GHG emissions.
And beyond the Federal regulatory expansion, states are contributing with more and additional government GHG mandates, including by way of example Maryland, which will initially require that commercial including multifamily building owners report GHG emissions to the State annually beginning in 2025, then achieving a 20% reduction in “net direct” GHG emissions from 2025 levels of similar buildings before January 1, 2030, a 40% GHG reduction before January 1, 2035, and be Net Zero before January 1, 2040.
This entirely new subject of government regulation is simply a bellwether for the biggest business opportunity in history, waiting to be unlocked.
As we recently blogged, Net Zero Risks as a Source of Opportunity, currently, in advance of all of the regulation to come, calculating net zero is ill defined, unregulated and complex. Definitions of what “zero” means vary greatly, including among many issues, whether a company can use carbon offsets or not. In a move toward a global standard, last month the UN released the Net Zero Pledge Standards for Business Released at COP27, but most US businesses will not be able to meet those global standards.
The UN report is premised on the urgent admonition that “to limit warming to 1.5°C, global emissions must peak by 2025 and be cut in half by 2030, on the way to net zero emissions by mid century.”
Calls for action by the UN are not without controversy and may not in and of themselves drive US businesses, but there is no debate that just weeks ago the world’s population exceeded 8 Billion. In 2023 the issue of increasing population in China is “out” and increasing population in India is “in.” The resources to provide light, refrigeration, heating and cooling to serve the growing population in India have global implications for GHG. Moreover, it is not settled that even a developed nation can attain Net Zero economy wide, or for that matter a state or other political subdivision, or even a business.
Maryland’s example of mandating that building owners (.. not the business occupants) disclose and reduce GHG emissions, ultimately to net zero by 2040, is a model being looked at approvingly by the environmental industrial complex and this appears the likely direction for the US economy.
Buildings where GHG cannot be disclosed and reduced risk becoming obsolete, as the market shift gathers even greater momentum in the coming years, and non GHG scoring buildings will become the real estate industry’s version of the buggy whip. Recall the rapid obsolescence of commercial buildings without central air conditioning in the early 1960s, and the massive decline in values in those obsolete structures as tenants sought out buildings with that innovation.
However, opportunities now abound as the current dinosaur fossil fuel economies that have existed substantially in their present form since the dawn of the industrial revolution with the coal powered steam engine, are today being transformed to achieve Net Zero emissions by 2050, and trillions of dollars will have to be spent annually on physical assets to accomplish that transition.
We invite you to join us in undertaking this epic business venture, the decarbonizing of the economy – to repair the planet and make your share of the trillions along the way.