The rise of ESG: aligning the values of people and markets

Prior to 2008, housing association private finance was dominated by long-term lending from UK banks and building societies.

However, the global financial crisis saw banks reducing balance sheet exposures and capital models becoming punitive for the sort of long-term lending traditionally provided to housing associations.

From around 2010 onwards, institutional investors were effectively asked to replace this long-term lending.

This has seen social housing become a widely recognised asset class of increasing interest to a wide range of institutional investors.

For example, social housing is well-suited to pension fund and insurance investment with its long-dated returns, underpinned by government benefit payments and secured by property.

Meanwhile, the sector has the potential to benefit from the significant increase in green, social and sustainable bonds issued globally in the past decade in accordance with the International Capital Market Association’s (ICMA) green, social and sustainability bond principles.

There is now a good opportunity for UK housing associations to list their bonds as “social” or “sustainable”, giving them access to a larger pool of investors, including European investors where there is high demand for such bonds.

This could potentially bring positive benefits on pricing. Clarion’s recent sustainable bond issue saw a high level of market interest from a wide range of investors.

But listing such bonds requires housing associations to measure and report on their ESG credentials in line with the ICMA Bond Principles. The ESG approach is designed to help with such reporting.

Expanding the investor universe

The sector has also seen the recent entrance and rise of new investors using equity-based models and establishing for-profit registered providers, such as Sage, L&G, Grainger and British Land, as well as specialist housing funds, such as Funding Affordable Homes.

Social housing strategies are also being developed by large real estate investment firms, such as CBRE Global Investors, LendLease and M&G.

Equity funding models bring opportunities but they also bring risks that need to be mitigated.

Ultimately, the motivations underpinning investment in the social housing sector are critical.

It is of fundamental importance that equity funding is aligned with and supportive of creating social value, not just financial value, and that financial returns are fair and do not extract excessive profit from the sector.

While a return to austerity feels unlikely, the UK government will undoubtedly be working under new fiscal constraints as it attempts to plot its way through a “new normal” post the COVID-19 crisis.

Public investment will continue to be essential, particularly to deliver social rent homes, but increased levels of private investment have long been needed to tackle the UK housing crisis.

The substantial rise of both ESG and impact investing provides an opportunity for housing associations to reach a far broader universe of investors.

Yet being able to communicate their ESG credentials effectively is crucial if housing associations are to succeed in doing so.

ESG data is an increasingly important means for allowing investors to identify organisations that are well positioned for the future and that have the potential to contribute to positive impact.

Building trust

With increasing investor interest in the social housing sector, including new entrants bringing new private equity and ownership models, it is important that the sector’s integrity and social purpose are not diluted.

The development of this white paper has demonstrated the high levels of collaboration and trust among the social housing sector and traditional lenders.

There is a need to build stronger understanding and trust of new funding models.

There are opportunities for mutually beneficial partnerships between private investors, local authorities and housing associations that could deliver both social impact and long-term sustainable returns.

Mark Carney, former governor of the Bank of England, wrote in The Economist last month: “The traditional drivers of value have been shaken, new ones will gain prominence, and there’s a possibility that the gulf between what markets value and what people value will close… economic dynamism and efficiency have been joined by those of solidarity, fairness, responsibility and compassion.”

I think we should be confident he is right and the social housing market develops in a way in which there is clear alignment between what the market values and what people value.

To read the report and submit feedback on its recommendations, visit www.esgsocialhousing.co.uk

Sarah Forster, chief executive, The Good Economy