For decades, commercial real estate investors have relied on a set of core due diligence reports before closing a transaction: property condition assessments, environmental site assessments, ALTA surveys and zoning compliance reports. While these reports remain critical risk assessment tools, another category of risk now deserves a place alongside these traditional investigations: climate- and sustainability-related risk.
The growing number of Building Performance Standards, energy disclosure requirements and climate-related regulations across the United States is changing the risk profile of commercial property acquisitions. Investors who overlook these factors during due diligence may discover unexpected capital requirements, compliance deadlines or operational costs after closing.
Building Performance Standards & Energy Compliance
Building Performance Standards, commonly known as BPS policies, are a prime example. These regulations establish energy or emissions performance targets for existing buildings and often require owners to benchmark energy use, implement operational improvements and report performance on an ongoing basis. Noncompliance can result in significant fines and penalties.
Building Performance Standards are only one part of a rapidly expanding regulatory landscape. Across the United States, more than 120 state and local benchmarking, energy audit and building performance ordinances are active or in development. Several states, including Colorado, Washington, Oregon, and Maryland, have already adopted statewide requirements, while California is actively developing its own statewide framework. As these policies continue to expand, investors may inherit significant compliance obligations, capital expenditures, and operational risks that are not identified through traditional due diligence alone.
For investors acquiring a single asset, understanding local requirements is important. For investors purchasing a geographically diverse portfolio, the challenge becomes even greater. A portfolio may include assets subject to different performance standards, reporting requirements, compliance schedules, and enforcement mechanisms. What appears to be a stable acquisition could carry substantial future costs if multiple properties require energy upgrades or operational changes to meet local regulations.
Understanding Climate Risk
The value of sustainability and climate risk screening extends beyond regulatory compliance. A thorough review can help investors understand a building’s energy performance, assess exposure to future climate hazards, and estimate capital expenditures that may be needed to maintain competitiveness. Climate Risk Assessments consider both physical and transition risks. Physical risks include potential losses due to wildfire, hurricanes, and other severe weather events. Transition risks include policy risks, as with BPS described above, but also loss of market value due to outdated building systems that do not meet the demands of a changing climate. Understanding both physical and transitional climate risk helps to inform underwriting assumptions and business plans before a transaction closes rather than after unexpected issues emerge.
Beyond Risk Mitigation: Adding Asset Value
Importantly, compliance should not be viewed solely as a cost. In many cases, energy efficiency improvements can reduce operating expenses, improve tenant comfort, extend equipment life, and enhance overall asset value. Buildings that perform well against evolving regulatory standards are better positioned to attract tenants, lenders, and investors, who increasingly consider sustainability factors in their decision-making. As a result, identifying compliance obligations during due diligence can help transform a potential liability into a long-term value creation opportunity.
These considerations underscore the importance of a multidisciplinary due diligence approach. Traditional due diligence disciplines remain essential, but climate resilience, energy performance and regulatory compliance each require specialized expertise. When these disciplines are evaluated together, investors gain a more complete understanding of both current property conditions and future obligations.
Furthermore, including sustainability, compliance, and resilience assessments during due diligence is an effective money-saving strategy. Collecting energy and resilience data along with PCA data reduces costs by eliminating the need for multiple site visits. More importantly, concurrent assessments allow for the most cost-effective timing of building system upgrades and for the costs of such upgrades to be included in capital planning. may reveal aging building systems that affect both operational performance and future compliance with local energy regulations. Compliance reviews before acquisition ensure that reporting deadlines or performance requirements are met before fines are incurred.
As climate-related regulations continue to expand and performance standards appear in more markets, investors who integrate sustainability and resilience screening into their acquisition process will be better equipped to make informed decisions. The goal is not simply to avoid surprises, but to understand how regulatory, operational and physical risks may affect an asset’s future performance and value.
In today’s market, comprehensive due diligence means looking beyond the traditional checklist. Climate and sustainability risks are increasingly material business considerations, and identifying these risks before a deal closes can help protect investments while positioning assets for long-term success.
