BNP Paribas: discounts on sustainability loans offer ‘material difference’

Measure for measure

 

Through the loans, housing associations receive a more favourable interest rate upon the delivery of pre-agreed social targets.

 

In August, Peabody became the latest to take up the model with BNP Paribas, with a five-year £75m revolving credit facility (RCF) with metrics linked to delivering childcare training. Meanwhile, L&Q and Optivo both agreed incentives linked to employment indicators.

 

Mr Reynolds said that its first SLL deal – a five-year £100m loan signed with L&Q in June 2018 – arose from its existing relationship with the group.

 

“The timing of the transaction was borne out of L&Q’s ambition to develop more affordable homes, and BNP Paribas looking to further grow our UK platform in a way that makes a real difference in society.

 

“Our subsequent loans to Optivo and Peabody followed a similar process – by working with them, we spotted an opportunity to align their financing costs in such a way as to incentivise them to do even more of the important social impact work they were already doing.”

 

“In all cases, the discount on offer should the borrower meet its social impact targets makes a material difference to their funding costs”

 

Mr Reynolds would not disclose the size of the discounts it has offered. But he added: “What we can say is that in all cases, the discount on offer should the borrower meet its social impact targets makes a material difference to their funding costs.”

 

How those metrics are recorded may itself present a hurdle to would-be borrowers and lenders.

“Reporting standards are a key challenge for sustainability-linked loans in all sectors – not only with housing associations – in part because these loans are still a relatively nascent product with a fair amount of variation and their own idiosyncrasies,” Mr Reynolds said.

 

However, BNP Paribas was actively involved in developing the sustainability-linked loan principles published by the Loan Markets Association earlier this year, alongside other financial institutions.

Mr Reynolds added: “[The] work to simplify the implementation of SLLs and introduce greater standardisation is under way and we are playing our part where we can.”

 

In time, the pool of banks offering the model to housing associations could widen, after established lenders NatWest and Lloyds both revealed to Social Housing in September that they were looking to introduce SLLs to their loan books in the sector.

 

Capital markets

 

SLLs are reflective of a wider movement towards socially responsible and/or impact investment within the financial world, which may be set to further influence UK housing finance.

 

As Social Housing has reported, a growing volume of funds seeking out investments with strong environmental, social and governance (ESG) credentials is increasingly being mooted as an opportunity for borrowers in the sector (see page 20).

 

This could include the adoption of ‘social’ or other sustainability-linked wrappers on issuances to the capital markets, amid growing demand from funds.

 

As such, BNP Paribas recognises this growing trend, having acted on a number of social bonds in different currencies across sectors including housing, Mr Reynolds said.

 

“This year, we acted on a social bond for Korea Housing Finance Corporation, the proceeds from which are being used to finance social housing mortgage loans.

 

“We also supported a bond issue for Dutch bank NWB, which is using the capital raised to lend to social housing organisations in the Netherlands,” Mr Reynolds said.

 

The bank had noted “significant interest” in ESG from investors in recent years, he added.

 

“We undertook a survey of global investors earlier this year, which revealed how the UN SDGs are becoming a new compass in the responsible investment journey.

 

“The majority of respondents are committing themselves to the 17-goal SDG framework and more than 90 per cent of respondents predicted that more than a quarter of their funds would be allocated towards ESG by 2021.”

BNP Paribas puts this growing interest down to three key reasons, Mr Reynolds said. First, increasing analysis on the performance of socially and environmentally responsible businesses by investors has increased their confidence that ESG investing means improved long-term returns.

 

Second, there is desire from investors to better understand the value they bring to social and environmental issues, and to measure themselves against ESG criteria.

 

Third is the need to mitigate risk. “[ESG] is increasingly being understood as a risk factor in terms of future regulation, consumer/reputational backlash, as well as material risks to business from not managing ESG correctly,” Mr Reynolds said.

 

But interest in ESG is a mixed picture globally, with BNP Paribas’ survey finding that around 64 per cent of respondents in Europe and across Asia-Pacific are planning to dedicate more resources to ESG, compared with just 52 per cent in North America.

 

In Europe, the bank has seen most interest from France, the Netherlands, Germany, the Nordics and the UK.

 

However, the US may slowly be catching up, Mr Reynolds said: “[Last] year we saw a rise in USD issuance as demand has grown.

 

“More US investors are launching sustainability and ESG funds, which tend to be more flexible than green bond funds because they allow for best-in-class players, pure players, and other ESG-type bonds.”

 

Don’t miss our afternoon stream ‘Social housing meets impact investing’ at the Social Housing Annual Conference on 4 December in London