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Managing ESG Risk through Local Law Compliance: NYC’s Building Rating System

Back in 2018, New York City initiated a pioneering energy efficiency building grade system as part of its greater climate mobilization act. Known as Local Law 33 (LL33), the ruling requires buildings over 25,000 square feet to display an A-D letter grade that represents the building’s energy performance. The goal is to provide greater transparency for all New Yorkers on the efficiency of the buildings where they live and work. 

Beyond the fact that reducing carbon emissions is inherently positive, why is this local law so important? With ESG top of mind, LL33 (among others) can be seen as an important exercise in risk management for building owners to safeguard their assets and prepare for the near future.

Before we expand on this, let’s first lay out some of the basic requirements of LL33. Then, we’ll explain how complying with the law – and others like it – can help building owners mitigate their ESG risk over time.

Basic Requirements of LL33:

LL33 requires buildings larger than 25,000 square feet to publicly display a Building Energy Efficiency Rating label, which consists of a letter grade denoting the energy efficiency of the building along with its ENERGY STAR® score. To meet this requirement, building owners must also comply with New York City’s Benchmarking Law (Local Laws 84 and 133) and disclose their energy consumption via ENERGY STAR Portfolio Manager by May 1. 

By October 1, the NYC Department of Buildings makes Energy Efficiency Rating labels available. Building owners are subsequently required to publicly display these labels by October 31 of each year.

Sample Building Energy Efficiency Rating from NYC Buildings

The ENERGY STAR Score grading system is as follows:
A: Score is equal to or greater than 85
B: Score is equal to or greater than 70 but less than 85
C: Score is equal to or greater than 55 but less than 70
D: Score is less than 55
F: Building did not submit the required benchmarking information
N: Building exempted from benchmarking or not covered by the ENERGY STAR® program

Energy grades are made publicly available online via the NYC Energy and Water Performance Map

The Risk of Non-Compliance 

While the fines for not complying with LL33 may seem minimal now, the consequences down the road might be much greater than they initially appear. 

For starters, as the world transitions to a more resilient and lower carbon society, cities like New York will continue to introduce legislation that requires industries and sectors to reduce energy consumption and curb emissions. The ability to keep up with new and changing laws like LL33 presents a new type of risk to organizations, defined by the Taskforce on Climate-Related Financial Disclosure (TCFD) as “Transition Risk.”

In real estate, LL33 is a perfect example of a type of transition risk that building owners should heavily consider. For one thing, it takes time to build the capacity to collect and report quality monthly energy data for benchmarking. And since local energy laws often build upon one another, the longer you wait to start, the harder it can be to catch up.

For example, tracking building energy consumption is the first step to benchmarking performance and complying with NY LL84. The same data is then needed to receive a building rating and comply with LL33. New York’s recent Local Law 97, scheduled to take effect in 2025, sets limits on carbon emissions for certain building types and sizes. This law will require building owners to have a head start tracking their energy consumption (as required by LL33 and LL84) and to then go even further in reducing energy consumption and relative carbon emissions – or else face serious financial penalties. 

Finding efficiency opportunities across a real estate portfolio can be a resource-intensive process which at minimum requires time and data. Organizations can simply not wait to get a plan in place until 2025. And if the penalty imposed by LL97 for exceeding the emissions limit is set incredibly high, the fines for non-compliance will rapidly become unmanageable for many. 

All in all, while the consequences of doing nothing may seem relatively minimal now, newer legislation will continue to raise the bar, posing the risk of compounding financial penalties and making it increasingly difficult for organizations to catch up down the road. 

Final Thoughts

As new regulations similar to NYC LL33 and LL97 continue to take shape around the globe, it will be critical for real estate organizations to keep pace, as the penalties associated with falling behind will become greater as more time passes. In addition to the direct financial costs associated with non-compliance, there may be other more indirect consequences as more and more information is made publicly available. 

Whether it be associated financial penalties for non-compliance, a “D” building grade, or a database entry denoting the excess GHG emissions associated with a given building, the growing wealth of publicly available information on building energy performance will function as an important cue for investors, prospective buyers, and tenants alike as they decide where to invest their money in the years to come. It’s safe to say that by complying with LL33 and other laws like it, you will be doing your due diligence to prepare for the immediate term while better managing your portfolio’s long-term risk.