Providers of affordable housing have always had a strong focus on environmental, social and governance (ESG) outcomes with the language that they often use frequently referencing relevant principles. A brief review of the websites and business plans for some of the leading UK providers sees focus on areas such as placemaking, safety, tenant engagement and environmental impact. In many ways affordable housing providers have therefore been at the forefront of the ESG movement with relevant principles embedded into their business models, and it should come as no surprise therefore that they potentially offer a perfect partnership for lenders and investors seeking to place ESG based loans and investments.
Sustainability linked loans
There has been a growing move to the provision of sustainability linked loans, with lenders offering a margin incentive (or penalty) against specified targets being met. The targets are generally modelled on a customer specific basis and can cover on a measurable basis such areas as use of renewable energy, the improvement of energy performance ratings or the increase of tenants in employment.
Historically, green and sustainability linked finance was the remit of specialist providers of finance but increasingly clearing banks and other mainstream lenders are targeting this sector.
Green, Social and Sustainability Bonds
These are any type of bond instrument where the proceeds will be exclusively applied to eligible environmental and/or social projects. Green bonds are used for projects with environment benefits, social bonds are used to finance projects providing a positive social outcome, and sustainability bonds are used for a combination of green and social projects. In each case the International Capital Market Association has published relevant principles and guidelines and these provide the leading framework globally for issuance of green, social and sustainability bonds.
As institutional and equity investment becomes an increasing contributor in the affordable housing market, the ESG linked credentials provided by the sector will form a core attraction, or requirement, for many institutional and private equity investors. With huge levels of funds now being ESG backed worldwide, affordable housing and its providers provide a natural home.
What this means in practice for affordable housing providers?
Affordable housing providers already apply ESG principles in their businesses. They should use this to their advantage when seeking funding and investment, whether through securing margin incentives from their lenders to investment in their business or ensuring that they maximise the potential sources of finance and investment available to them.
The benefits should be available across the sector and benefit small community based housing associations through to the largest affordable housing providers.
Gathering the data
As a first step, affordable housing providers should be ensuring that they capture the relevant supporting information underpinning their ESG credentials. Increasingly this is likely to be a requirement of their regulators, lenders and investors and it makes sense to ensure that such information is produced in a consistent format that will generally be acceptable to recipients. In this regard, some useful guidance may be available under the white paper entitled 'UK Social Housing: Building a sector standard approach for ESG reporting' recently produced by the Good Economy with input from a number of sector stakeholders.
In conclusion, therefore, whether it is a query when negotiation terms for a loan facility as to whether a sustainability linked covenant might be available to reduce a margin or in connection with a more structured approach to the capital markets or institutional investors, affordable housing providers should see ESG principles as a potential tool in their negotiation box.