There is an initiative to launch a standard approach to Environmental, Social and Governance (ESG) reporting for the social housing sector. But why should Registered Providers (RPs) now be focusing on ESG, and what is being proposed?
A White Paper entitled “UK Social Housing: Building a Sector Standard Approach for ESG” was published on 6 May 2020 and proposes sector-standard ESG criteria and metrics. The proposed 45 criteria cover all ESG elements across 10 themes including building safety, staff wellbeing and climate change. The working group that developed the White Paper was brought together by Peabody and Centrus and includes RPs, investors, organisations concerned with growing impact investment and service providers from across the sector. The paper itself was produced by The Good Economy, a specialist impact advisory firm.
The proposals contained in the White Paper are based on a review of ESG investor questionnaires and consultations with RPs, investors and experts.
In recent years we have seen a number of financial institutions offer incentives for improved ESG performance through sustainability-linked loans (SLLs) that typically offer interest rate reductions for achieving pre-agreed impact targets. The Loan Market Association (LMA) has published Sustainability Linked Loan Principles to provide a framework for SLLs in recognition of such loans becoming an increasingly important area of finance. SLLs totalling approximately £475 million have already been completed in the social housing sector.
Green, social and sustainable bonds issued in accordance with the International Capital Market Association (ICMA) Green, Social and Sustainability Bond Principles have also significantly increased over the last few years. Clarion raised £350m in January this year with the social housing sector’s first sustainability bond issuance that achieved an all-in effective rate of 1.88%, being the lowest interest rate for a primary bond issuance by a RP. This followed on from Clarion having been accredited with the pan-European ‘Certified Sustainable Housing Label’ which aligns with the ICMA principles. MORhomes also adopted the ICMA social bond principles with its first issuance last year.
Being able to demonstrate achievement of ESG objectives will attract a wider variety of investors in addition to the pricing benefits it may have. An increasing number of investment funds are now focusing on ESG in particular since the revised UK Stewardship Code was launched in October 2019 that expects asset owners, such as pension funds and insurance companies to take ESG factors into account. RPs and the purposes for which they operate are clearly well placed to attract these investors. However, there is currently no standard way of reporting on ESG in the sector and more structured and consistent reporting is needed in order to maximise this opportunity and meet ESG investor requirements.
One of the core principles of the White Paper is that the criteria should be capable of being adopted by RPs of any size. This is supported by another core aim of the proposal which is to use metrics already being measured by RPs. For example, it is suggested in the White Paper that the HACT’s social value approach that is already adopted by some RPs means they will already be producing the data required for some of the criteria.
The White Paper also proposes the formation of a properly representative industry body to consult with sector stakeholders and issue guidance on an ongoing basis.
The sector-wide consultation is open for written responses until 15 June 2020 before the first version of the recommended standard ESG approach is published in summer 2020.
A full copy of the White Paper and details on how to respond to the consultation can be found at via this link.
If you would like to discuss this or other elements of ESG, please contact the banking and finance team at Bevan Brittan.