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New Presidential Directive Tackles Climate-Risk. Its Potential Could Squeeze Housing.

In a move consistent with his administration’s climate-forward agenda, President Biden recently issued an executive order (EO) directing the federal government to perform a broad strokes review of the impact that climate-based financial risk could have on nearly all facets of life.

The EO contains an extensive to-do list for administration officials, directing the National Climate Advisor to assess within 120 days the financing options needed to meet greenhouse gas emission goals and the Financial Stability Oversight Council to publish a report on strategies for reducing climate-based risks to national financial stability.

The sweeping order signals major policy recommendations for the economy could be on the horizon.  

If the main concern of the EO is identifying and eliminating climate-based financial risks, then requiring climate-based risk disclosures for businesses would seem like a logical first recommendation. In April, Senator Elizabeth Warren (D-Mass.) reintroduced the Climate Risk Disclosure Act which would mandate publicly traded companies to provide annual disclosures of the physical and transitional climate-based risks they face, as well as their steps towards mitigation. Similarly, the Securities and Exchange Commission is also soliciting practitioner feedback on its own efforts to mandate climate-risk disclosures for reporting companies. One study suggests that rising temperatures could reduce global income by as much as 23% by 2100.

Risk disclosures will have immediate impact on rental housing properties operated through publicly traded companies and real estate investment trusts. Owners and operators will need to consider the transitional risk including changing resident behavior, increased insurance premiums, and extensive retrofit and efficiency upgrades. Naturally, owners and operators will also need to identify the risks to overall housing affordability in the context of both compliance requirements and a shrinking housing supply.

Private rental housing providers may not be in the clear either. At all levels of government, from Kansas City to the State of Connecticut, lawmakers have considered utility disclosure bills requiring housing providers to provide prospective renters with an estimate of monthly utility expenses. In the spirit of creating transparency and stability for American renters, a federal standard for utility disclosures may too be filed amongst policy recommendations.

Not only does this requirement place a significant compliance burden on housing providers, it also provides renters with an impractical expectation of utility expenses as it only takes into account the energy consumption behavior of the previous resident. Furthermore, the market pendulum swings out of favor for older, more naturally occurring affordable housing due to infrastructure unable to accommodate expensive energy efficient upgrades.

The rental housing industry recognizes the financial and social importance of creating sustainable communities for its residents. Climate-risk disclosures will, no doubt, increase external pressures to build resiliency in the nation’s housing stock. To meet this challenge, housing providers must have access to incentives or other mechanisms to help offset the often cost-prohibitive energy standards of today.

For more information on sustainability, resiliency, and climate-related issues, please contact Sam Gilboard, NAA’s Manager of Public Policy.