Why lenders want to see you internalise external ESG standards

Data

Organising data into an accessible and accepted format is crucial for stakeholders, as it helps with comparability.

Some systems are more mature than others. For example, measuring and managing emissions data in line with the Greenhouse Gas (GHG) Protocol is widely accepted as the standard methodology.

And it often serves as a preferred input into other systems (eg Streamlined Energy and Carbon Reporting – SECR, Science Based Targets Initiative – SBTi).

Other important environmental data points are also reasonably uniformly tracked across the housing sector in terms of the energy performance of units (eg SAP/ EPC), with perhaps more consolidation required on waste and water measurement.

Biodiversity and capturing appropriate metrics are rising up the agenda for European governments and other stakeholders. This will be supported by the launch of the Taskforce on Nature-related Financial Disclosures (TNFD) next month.

TNFD will provide recommendations when organisations report about their exposure to natural risks, including loss of biodiversity and ecosystem degradation.

Social data has been less consistently captured, in part because of collectability challenges. In terms of impact, there is also perhaps less consensus on the most representative metric.

However, a number of systems for measuring social value are available. These include the National TOMs via the Social Value Portal, HACT’s Social Value Insight tool and UK Social Value Bank, as well as guidance from Social Value UK and the National Housing Federation.

More generally, HACT’s UK Housing Data Standards seek to streamline the data collection and reporting process.

And of course, no conversation around sustainability data is complete without referencing ESG rating agencies. This will be an interesting space to monitor, as regulation proposals are afoot.

Target-setting

The old adage of being unable to manage what you can’t measure certainly holds true for sustainability. Once data is captured as accurately as possible in a comparable format, setting impactful targets becomes more accessible.

Starting with emissions, the corporate community has gravitated towards a scientific approach, which is exemplified by the SBTi.

SBTi targets provide companies with a clearly defined path to reduce their emissions that is aligned with the goals of the Paris Agreement: to limit global warming to 1.5° C above pre-industrial levels. 

While there has been limited uptake across housing associations, probably because the mapping of emissions in the sector is nascent, we expect this to change. A handful has already made commitments.

In terms of key performance indicator-linked financing, SBTi targets are viewed as the gold standard for emissions targets and are well received by lenders and investors alike.

As the adoption of social impact metrics develops, there are fewer benchmark targets.

However, regarding diversity in the workplace, organisations could consider the 30% Club, which aims to increase gender diversity at board and executive committee level, or the Parker Review, which sets out recommendations to improve ethnic diversity.

Reporting

Reporting binds the other two constituents together, while providing the opportunity to publicly align with external standards.

There are a multitude of standards to opt for, but fear not. The Sustainability Reporting Standard for Social Housing (SRS) goes some way to consolidating reporting requirements for the sector. Helpfully, it also considers some of the other, non-sector specific, reporting standards.

The SRS is voluntary and consists of 48 criteria across environmental, social and governance measures, such as carbon targets, affordability and safety standards.

Many stakeholders from across the sector contributed to the SRS (including NatWest) and they look set to continue this process. SRS version 2.0 is due to launch this September, following v1.2 in 2022.

Members of the housing association community have a unique opportunity to adopt the SRS and contribute to the conversation of what future versions of the standards will look like. Not all sectors have coalesced in this way.

For lenders and investors, recording data, setting targets and reporting in line with external standards look set to be increasingly important.

The ability to rely on information and compare it will probably have a direct impact on bank reporting and could thus feature increasingly in future institutional decision-making.

Tom Gidman, director of ESG advisory, NatWest