Thursday, September 20, 2007

Climate Change Legal Risks: Energy Companies Feel the Heat

“Selective disclosure of favorable or omission of unfavorable

information concerning climate change is misleading.”

-- New York Attorney General Andrew M. Cuomo to Energy Companies

Check out’s excellent post on the creative use of existing law to sensitize corporate investment practices to climate change risks. Following predecessor Eliot Spitzer’s example, New York Attorney General Andrew M. Cuomo is using an almost forgotten law to investigate five energy companies, which intend to build coal-fired power plants. The Attorney General’s correspondence advises the energy companies that they should have made their investors aware “of the growing potential that they may be taking on big financial risks by building coal-fired plants.” The Attorney General’s overarching thesis is that publicly-traded companies are legally liable for taking undisclosed risks that could diminish their value to shareholders. The goal appears to be one of forcing polluting companies to proactively reduce their carbon emissions.

My synopsis: this investigation, if successful, will propel commercial real estate's risk management practices and corporate social responsibility into a new millennium -- at warp speed.

In commercial real estate finance and investment, hard money liability, regulatory and reputation risk directly affect bank and investor decision making. Such amounts flow through to net cash flow or funds from operations, meaning the potential for deterioration of net asset values and with it, market capitalization and shareholder value.

Real estate investment trusts (REITS), being publicly-traded, should immediately begin to incorporate climate change risk into their corporate and portfolio risk management processes. Their client investors (pension funds, etc.), are probably following this carefully, too, and will start requiring similar reporting disclosures. It goes even further: other investment real estate developers and operators who want to do business with REITS (practically everyone else in the industry) will have to be similarly compliant. After all, no one will take an asset into their portfolio until they are sure that they can understand and economically manage that building’s carbon footprint in compliance with the law and market expectations.

And here's the competitive advantage angle for Green Real Estate Investors...

In the course of meetings yesterday with a couple of investor clients who already develop green apartments and retail, I asked about their motivations to focus on building green real estate. Besides the fact that they felt it is the right thing to do, they honed in on their perceived risks of not going green. Both developers indicated that they see the potential of the federal or state government passing some form of carbon tax on commercial property as being imminent. They, too, perceived any type of carbon tax as being a direct hit to their bottom lines and, therefore, a valuation risk to their properties. Already being green puts them at a competitive advantage in such an environment.

1 comment:

Steve Eugene said...

Lisa, You are absolutely right about the drastic changes we are going to face in the future. Unfortunately, when we talk about this kind of future, we are talking about the next few years before the damage already done has progressed too far. To reverse the impact of climate change will require a no less than a complete change of the prevailing mindset. And the bitter truth is that the most powerful incentive to change behavioral patterns (of real estate owners) is money. You only put your money there where your mouth is, if you have a reason. Put it another way, being green does not suspend the basic law of economy. At least not until the public acknowledges such investments in green technologies and improvements as desirable and is willing to pay a premium for such products (or in our industry properties). But I see a lot of change and am still optimistic.

Let's get in touch, I'd like to learn more about the projects you're working on.