ESG finance discounts not ‘even close to being enough’, says housing association CEO

Speaking on the same panel, Marcos Navarro, director and sustainability lead at NatWest, said that the typical margin discount he has been seeing for sustainability-linked loans in social housing is around 2.5bps to 5bps.

For NatWest, he said, this represent “an incentive for organisations that are really going above and beyond”, as a discount on top of the “best possible base margin [given] to any organisation as a starting point”.

Mr Navarro said that while borrowers in other sectors, such as private developers, might receive larger discounts in terms of basis points, it is important to remember that housing associations start from a better position on pricing.

“The sector has always benefited from its social credentials, so the margin that a housing association is able to achieve versus another private developer is significantly lower based on its credentials already.”

On the broader costs of funding, he said future changes – alongside steps including NatWest’s recent ‘social bond’ Euro issuance, which saw it explicitly link to its affordable homes debt portfolio – could help it to pass on reduced cost of funding in future.

“In terms of the way banks are funded, at the moment there isn’t necessarily capital relief that we can pass on. That being said, there are some changes coming down from capital treatments in regards to infrastructure [and] it will be interesting to see how we can pass that benefit on to organisations.”

Brendan Sarsfield, incoming chair of the Sustainability Reporting Standard for Social Housing, and outgoing chief executive of London-based association Peabody, said it is likely that government will start either taxing banks on certain types of investment or giving tax rebates in future.

“I think we’re going to see a lot more government intervention in this area, which will shape the kind of discounts we get,” he said.

Speaking earlier at the conference, on a session entitled ‘Talking to your investors’ on 19 May, Eugenia Korobova, debt origination manager at the Pension Insurance Corporation (PIC), said that because of the way the funder is regulated, ESG is unlikely to have a pricing impact on new issuance, although it is an important part of credit analysis.

“It wouldn’t necessarily impact on the price from our perspective, because it’s difficult for us to give the benefit for ESG just based on how our capital model works today and how we are regulated. But if that were to change in future then absolutely we could take that into account.

“In terms of the credit analysis, I think that social housing in general already has very strong ESG credentials, so I think it’s more of a way of formalising what the sector has already been doing in the past and [it’s] a way of taking that into consideration in our credit analysis.”

Elsewhere at the conference, at a session entitled ‘Funder view of the sector’, speakers were invited to answer whether ESG is a ‘box-ticking exercise, a badge of honour, or a genuine catalyst for change’. Answering the question, David Cleary, managing director – head of housing at Lloyds Bank commercial banking, echoed Mr Sarsfield’s point that ESG factors would likely influence the cost of capital in future.

“It will seriously affect the cost and availability of capital going forward, so if I look at the bank’s balance sheet and where we’re being targeted and we’re being measured by the Bank of England and others, cost and availability will all be driven by ESG. So it absolutely isn’t a box-ticking exercises from a banker’s perspective.”

Lloyds has previously set out an ambition that at least a third of the targeted £1.5bn of funding it will invest in UK social housing this calendar year will be ESG-linked.

Fellow panellist Fiona Dickinson, investment director at Aberdeen Standard Investments, said that from an investor’s perspective ESG is “definitely not” viewed as a box-ticking exercise, but with much “serious focus and attention”.

But she said it is very important for the sector to avoid any accusations of greenwashing.

“I think we need to be careful where we are introducing ESG-motivated funding that that is very much measurable and certified, and it’s not people marking their own homework. I think there’s a lot of evolving to be yet carried out in the sector in terms of how ESG values are measured. We’re obviously at the very early stages of sustainable reporting standards and various other entities are bringing out their other frameworks, which will hopefully mirror those so that we do have a common standard throughout the sector.”

Sounding a similar note of caution on the wider ESG landscape, Pete Gladwell, head of public sector partnerships at Legal & General, suggested that the sector should subject the entry of ‘impact investors’ into the sector with the same level of scrutiny as any other investors.

“I am a firm believer in investing for impact, not ‘impact investing’. By which I mean I think there is a real risk that we create this marginalised ‘on-the-side’ sector that does a bit of good without really being accountable for the impact of our entire portfolio.

“I would be extremely sceptical about some of the ‘impact investors’ out there. I would be extremely sceptical about some of their models.”

The Social Housing Finance Conference 2021 took place from 18-20 May online. For more information on Social Housing conferences and wider Ocean Media Group events, click here.