Sustainability and housing: A seismic shift

We have over the last couple of years increasingly seen sustainability/ESG linked provisions being included in new finance arrangements for housing development and investment. These generally provide for small pricing reductions to be applicable in the event that specified ESG linked targets are satisfied. I would suggest however that there has more recently been a seismic shift in thinking around sustainability and that the finance market is rapidly moving to a Rubicon moment following which such provisions will no longer be seen an added or optional benefit but instead standard terms to be applied across all transactions. That in turn is being driven by their shareholders, pension holders and regulators.

Not an optional extra

Rather than being an optional extra, sustainability linked provisions are likely to become as boiler-plate an inclusion in a finance contract as reps and warranties, information undertakings and financial covenants. Indeed they have much in common with financial covenants, being set over a forward looking period, underpinned by business plans and projections, measurable and subject to compliance certification.

Housing an obvious target

Housing is an obvious target for ESG, particularly given the focus to achieving a net-zero carbon economy, and the large role in carbon use that housing plays. The 'Environmental' limb of ESG has understandably been the subject of much of the focus to date. However, the 'Social' and 'Governance' limbs are increasingly also attracting attention. Many of the players in the housing market, particularly housing associations and other not-for-profit providers who play such a significant role in the market, have been ahead of the curve in their focus on social and governance related topics, but this also needs to be a focus for private sector housing market participants. It is not sufficient simply to be looking at reducing EPC ratings.

Needs to be a core focus

To the extent therefore that housing developers and investors are not already focused on ESG and sustainability, I would suggest that this should form a core business focus. This means in practice ensuring that a business has a clearly identified sustainability strategy with key targets and KPIs identified. These need to be realistic but challenging to avoid any suggestion of green washing.

Need for buy-in from top

It is also important that there is buy-in and investment at board level and a clear understanding as to why this is being done. I would suggest that this should recognise that this is not a nice to have policy or strategy but something that is accepted and understood to be core to the business and its interaction with society. There is no point doing this because it is something funders and investors will want to see. It has to be done because it is the right thing to do for the business, its employees, tenants and wider society.

Those businesses that get ahead of the curve on this will be much better placed to address the future needs of funders and investors.


Chris Dun