Removing regulations doesn’t reduce climate risks

Rolling back climate regulations doesn’t remove climate risk. It makes it harder to measure and manage. Recent U.S. policy shifts create uncertainty for real estate investors, undermining incentives, transparency, and long-term planning. Short-term relief may come at the cost of greater future exposure. Stefany Moreno Burbano, PhD Candidate in Finance at the School of Business and Economics, Maastricht University, explores in this article the implications for property values and investment decisions in a landscape marked by growing regulatory uncertainty.

Regulatory landscape surrounding climate risk

Recent executive actions by the new U.S. Government have altered the regulatory landscape surrounding climate risk, with potential implications for real estate investors. The Government has enacted executive orders challenging state-level climate regulations and the suspension of the Inflation Reduction Act (IRA).  In addition, the SEC has withdrawn its draft 2024 climate disclosure regulations. The direct and indirect consequences for real estate investors regarding the management of climate-related risks remain uncertain.

Executive orders and state-level climate initiatives

One of the most significant regulatory shifts occurred on April 8, 2025, with the issuance of the executive order “Protecting American Energy from State Overreach.” This order directs federal authorities to identify and potentially challenge state and local climate laws that “burden[] the identification, development, siting, production, or use of domestic energy resources”. Targeted regulations include those addressing climate change, carbon taxes, environmental justice, and ESG policies. Among the policies under scrutiny are California’s cap-and-trade program, New York’s congestion pricing and the “Climate Superfund” laws enacted in New York and Vermont, which require fossil fuel companies to compensate for past environmental damage. This federal-state conflict introduces significant uncertainty for investors who have been following state-level and local climate regulations to assess long-term property risks and valuations.

While deregulation may offer short-term relief by reducing operational costs for real estate developers and investors, it potentially increases long-term transition risks. Properties that initially benefit from fewer regulatory burdens could face sharp valuation corrections if consumer preferences shift decisively toward sustainability or if future administrations reintroduce stringent climate policies. The executive order could also impact the future supply of clean energy, a crucial component of green retrofits. Efforts to revive fossil fuel industries, such as coal, may undermine investment in renewables, making clean energy more expensive and the supply less predictable. This volatility could complicate long-term energy upgrade strategies for real asset owners. However, several states have signalled strong resistance. New York and California have reaffirmed their climate commitments, reinforcing regulatory continuity at the local level and potentially preserving a premium for properties that incorporate energy efficiency upgrades or pursue carbon emission reduction strategies.

Legal ambiguity undermines climate Investment confidence

Even if the federal government cannot unilaterally revoke states’ constitutional authority to implement environmental protections, there is concern that the judiciary might uphold the administration’s challenges, potentially undermining state-led climate initiatives. For instance, a proposed bill that seeks to provide relief from the stringent requirements of Local Law 97, which were previously blocked, could find its way to success. While these initiatives might temporarily ease financial pressures on property owners, they also introduce policy uncertainty, potentially delaying much-needed investment, including necessary retrofits and missing the opportunity to align them with natural building maintenance cycles.

If the Executive Order is interpreted more broadly to discourage climate-aligned investment, it could send conflicting signals to institutional investors. While cities like New York double down on emissions compliance, federal efforts could discourage ESG-linked capital allocation. Commercial property owners may face increased uncertainty about whether environmental-related investments, such as retrofitting buildings for Local Law 97 compliance, will continue to be financially rewarded or supported by broader market trends.

Freezing of the Inflation Reduction Act

The suspension of incentives provided by the IRA Act could be another potential indirect impact on climate risk management in real estate investments. The IRA previously offered financial incentives, including tax deductions and credits for energy-efficient upgrades, playing a crucial role in making retrofits financially viable for commercial property owners. Its freeze now acts as a disincentive to sustainability investments, particularly for capital-intensive improvements with extended payback periods. It’s real, could result in a slowdown in the adoption of green technologies, ultimately undermining both the operational performance and the asset value in a market that increasingly prices in environmental credentials.

This is also relevant to the ambitions of REITs and non-listed funds aiming to decarbonize their portfolios by switching to electricity. With key renewable energy projects delayed or defunded. For instance the recent cancellation and then reinstatement of Equinor’s $5 billion offshore wind project near New York,  raises questions about the future viability and cost of clean power. For property owners betting on electrification to meet sustainability targets, the weakening of clean energy supply sources raises concerns about rising operating costs and emissions intensity. From a broader investor perspective, it is also damaging. It reverses investment decisions that have already been approved and projects that have already started. For long-term capital providers, such as real estate investors, this erodes confidence in the stability of the broader investment landscape.

SEC’s Withdrawal from Climate Disclosure Rules

The Securities and Exchange Commission’s recent decision to cease enforcement of climate disclosure rules introduces a new layer of opacity into the real estate investment landscape. Without mandatory and standardized reporting on key metrics such as Scope 1, 2 or 3 emissions or energy intensity, investors struggle to assess financially material climate-related risks. Similarly, the removal of this regulation diminishes transparency regarding physical climate risks, such as susceptibility to flooding, wildfires, and extreme heat. The absence of reliable disclosures significantly complicates the accurate pricing of climate risks into real estate assets and heightens the likelihood of abrupt market corrections once actual climate vulnerabilities become apparent.

For publicly listed real estate investment trusts (REITs), the regulatory rollback creates a credibility gap. If firms are no longer required to disclose basic emissions data, investors lose a key tool for comparing risk across portfolios. Although states like California are moving forward with their climate disclosure laws, the result may be a fragmented regulatory landscape in which firms must navigate inconsistent requirements across jurisdictions.

However, this retreat may elevate the strategic importance of voluntary disclosure. For institutional investors with ESG mandates, transparency may become a marker for credibility, signalling that sustainability claims are backed by data rather than greenwashing.

Rising Insurance costs and FEMA cuts

Rising insurance premiums, driven by both intensifying climate risks and regulatory uncertainty, are also reshaping real estate dynamics. According to First Street Foundation, insurance costs as a share of mortgage payments surged from roughly 8% in 2013 to over 20% by 2022, transforming what was once a minor operating expense into a central financial concern for property owners and investors. Federal policy shifts, such as the freeze on FEMA disaster relief grants, further amplify these pressures by weakening post-disaster recovery efforts. The administration has terminated FEMA’s Building Resilient Infrastructure and Communities (BRIC) program, which had allocated over $3.6 billion for disaster-prevention projects across the U.S. The cancelation has disrupted critical infrastructure improvements aimed at mitigating natural disasters, particularly in disaster-prone areas, with concerns that it undermines proactive disaster resilience efforts and increases future recovery costs.

The combined effect may be higher living costs and greater financial exposure for property owners in climate-vulnerable areas. These pressures could accelerate population shifts away from high-risk areas and erode returns on properties that have not prioritized resilience or energy efficiency. With less federal support and public awareness of climate risk increasing, consumer preferences are expected to shift further, placing a premium on more climate-adapted assets and leaving less-prepared properties that are increasingly exposed.

This may be just the starting point

Climate risk has not disappeared; it has merely become harder to measure, price, and manage. The shifting U.S. regulatory landscape could potentially penalize unprepared investors while rewarding those who proactively integrate climate resilience into their strategies. The rollback of disclosure rules not only reduces data availability and transparency but also undermines the frameworks used to accurately price climate risk and allocate capital. The suspension of FEMA grants may further hamper recovery from extreme weather events. Moreover, uncertainty surrounding state-level climate laws adds another layer of unpredictability, complicating long-term investment planning. Real estate investors require clarity, consistency and continuity from regulatory frameworks, including climate regulation.  Although deregulation can offer short-term gains from lower costs, investors will be mindful of the potential for future changes in climate policy and the possibility of rising climate-related expenses. In the long term, they will be aware of the need to address the financially material consequences of physical and transition risks in their portfolios.

Call upon other investors to collaborate to achieve real-world impact

GREEN is a not-for-profit collaborative engagement initiative for institutional investors, focusing on reducing climate risk in the real estate industry. GREEN members acknowledge the importance of collaboration to initiate change and maximize impact. We, therefore, call upon other institutional investors to join GREEN and work together towards a Paris-aligned real estate sector. Check the investor statement for more information.

Disclaimer

The views presented in this article reflect the views of the GREEN Secretariat but do not necessarily represent those of the individual GREEN members.