In this Governance Spotlight we are doing a deep dive into the key themes in the new Code of Governance
Environmental sustainability as a governance priority
This week we are looking at the Code’s new requirement for boards to set financially sustainable plans with specific consideration given to “carbon neutrality and environmental sustainability”.
The financial position and charitable nature of housing associations place them in a unique position to innovate to deliver new, energy efficient homes. Not only does this contribute towards the Government’s net zero carbon targets and have wider societal benefits, it also directly benefits tenants through warmer homes and reduced energy bills.
However, as the vast majority of the homes that will exist in 2050 have already been built, a significant financial investment will be required to either retrofit existing social housing, or demolish and start again. It is clear that environmental sustainability is not just a key strategic objective because of the societal benefits, but because it is a financial liability that will increase year-on-year. Looking ahead to the Social Housing White Paper, the sector may also be forced to make bigger strides in this area sooner rather than later as part of a revamped Decent Homes Standard.
So what do you need to do?
Set your strategy
Most associations will have well established strategies and policies spanning all three pillars of sustainable development including financial, social and environmental. You may want to take this opportunity to revisit those strategies and policies, particularly in light of the new Sustainability Reporting Standard for Social Housing.
For those who are catching up – you should start thinking about:
- LEARNING – reach out to others in the sector and beyond to learn what is already being done elsewhere and to avoid reinventing the wheel
- BENCHMARKING - carry out benchmarking studies of your organisation to identify and appraise your current impact on the environment
- PLANNING – developing strategic plans and policies with clear visions and objectives for the medium to long-term
- DELIVERING – prioritise key actions and outputs, consider any quick wins over the short-term which will can create momentum, and start to put the high impact projects into motion
- REPORTING – share the vision, planning and progress against the baseline, disseminate the lessons learned with key stakeholders, and seek feedback in order to secure buy-in.
As with all new growth areas which require a brave new vision and innovation, capital investment is critical to success. Funders and investors in the sector are becoming increasingly focused on Environmental, Social and Governance (ESG) performance. Metrics and reporting are key to obtaining ESG funding, so you will need to ensure you set clear targets and strategies for achieving those targets, together with processes for monitoring and reporting along the way.
The Sustainability Reporting Standard for Social Housing was published on 10 November 2020 by the ESG Social Housing Working Group – consisting of banks and investors, housing associations, service providers and impact investing organisations. It is a voluntary reporting framework to enable reporting in a transparent, consistent and comparable way, covering 48 criteria across ESG considerations including zero carbon targets. Whilst it is voluntary, we expect that most funders and investors will now include ESG reporting requirements in their documentation.
We are working on all four of the first UK pilot projects rolling out the EnergieSprong model for whole-house retrofit. By their nature, these projects start small with a handful of homes; but the intention is scale-up to provide economics of scale and achieve a long lasting and meaningful impact.
Financing your strategy
There are a number of funding options you can consider. We have been working with clients accessing:
- £2bn Green Home Grant scheme - launched by the government at the end of September, the scheme enables homeowners (including housing associations) to apply for grants of up to £5,000 per home to fund energy efficiency improvements.
- £50m Social Housing Decarbonisation Fund - launched by the government for 2020-21 to pilot new approaches to decarbonisation.
- Retrofit Accelerator - London-based, this scheme aims to transform the way London retrofits its ageing and energy-inefficient housing to create warm, affordable and ultra-low carbon homes.
However, it is clear that overall retrofitting costs across the sector will be significantly higher than the government funding committed to date, and therefore finance from other sources will be required.
We are now seeing a number of funders in the sector offer sustainability-linked loans that typically offer interest rate reductions for achieving pre-agreed impact targets. Green, social and sustainable bonds issued in accordance with the International Capital Market Association Green, Social and Sustainability Bond Principles have also significantly increased in the sector recently. Taking steps towards carbon zero should therefore enable housing associations to attract more funding of this nature.
For smaller housing associations, community bonds could provide the funding support needed. These are bonds issued directly to the public and we are starting to see them being used by local authorities to support their green initiatives. Earlier this year West Berkshire Council launched a green bond offering local residents and community groups the opportunity to invest in green schemes for a minimum of £5 with returns of 1.2 per cent per year over a five-year term. They raised £1m to go towards funding their plans to achieve net zero carbon by 2030. Warrington Borough Council has also launched a similar bond to support green projects and its efforts to become Britain’s first carbon neutral town. The advantages of schemes such as this is that not only do they raise funding but they also encourage the local community to engage with net zero targets.
Embedding your strategy through governance
Your governance structure should reflect the strategy that you have set. Next steps here will include:
- Engaging with the team responsible for driving forward environmental sustainability within your organisation to understand:
- How the strategy touches the different parts of the business. This is likely to touch on areas across finance, development, procurement, asset management and audit and risk – as well as governance. Will your organisation adopt the Standard? Is there (or should there be) a working group?
- Engagement with the board and committees – how is this being done, should it change, do terms of reference need to be reviewed?
- Plans for wider engagement with stakeholders and residents – the reporting requirements in the Standard are an excellent opportunity to tell your story.
- What contribution is required from the governance team on an on-going basis to drive this forward and ensure monitoring and reporting is effective.
- Impact on policies, procedures and processes.
- How policy and legal changes are being monitored in this area and being communicated across the organisation.
- Considering whether to appoint a ‘champion’ on your board – this could potentially be a Senior Independent Director or other senior non-executive who has the authority to drive the agenda forward.
- Your risk registers should also appropriately reflect this as a key financial risk to the organisation.
We are advising across the housing sector on the environmental sustainability agenda. Please get in touch with one of the team if you would like to discuss this.
Look out for the next Governance Spotlight Special: New National Housing Federation Code of Governance in-focus.
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