Lloyds: at least a third of £1.5bn social housing funding in 2021 to be ESG-linked

‘Green building tool’

Alongside sustainability-linked funding to the sector, a new ‘green building tool’ developed by the bank for its corporate clients will provide another kind of support.

The tool enables organisations to assess the energy efficiency of their buildings and makes recommendations on how they may improve them with the addition of, for example, insulation or solar panels.

Lloyds has now uploaded more than 200,000 properties into the tool on behalf of its social housing clients and will be sharing this data with individual organisations in the coming month.

Mr Cleary said: “It supports clients to understand the financial cost of making retrofit changes as well as the length of payback by way of energy savings. It’s more important than just a funding mechanism, as it enables chief executives and property directors to look at their portfolio and establish exactly which properties are very poor from an EPC and SAP rating and which are very high, and they can focus their attention and strategy.”

Mr Cleary sees the focus on energy-efficient buildings as having “really risen in prominence in the last 12 to 24 months”.

He said: “I think associations are very aware of EPCs and SAP, they’re aware of it from a residents’ fuel poverty angle and reducing fuel bills as well as lower carbon emissions from that side.

“From a funding perspective, be that the bank market, the bond market or the private placement market, then I think the lenders and funders to the sector are very aware of the future valuation impact of EPCs.”

Social Housing revealed on Thursday (4 March) that housing associations are beginning to approach lenders to discuss carve-outs on loan covenants in relation to spend on carbon-zero related retrofitting measures. Meanwhile, carve-outs on fire remediation spend have also been discussed.

Asked about Lloyds’ position on these requests, Mr Cleary said: “We are open to those conversations. As with fire safety, if the client has a business plan and a model and it can clearly articulate the spend, timeframes, benefit to the association and residents and we can map through the financing, then yes, we’re open to those conversations.”

Lloyds has previously agreed carve-outs in relation to fire safety and to retrofit.

Sustainability-linked lending

Looking ahead, the bank’s pipeline is strong for sustainability-linked finance, with associations’ strategies much clearer than 12 months ago, Mr Cleary said.

A year ago, many associations may have talked about ESG and internal approaches on investor roadshows, but were not yet ready to publish a framework.

“Whereas what we’re seeing now is those frameworks are much more established, their KPIs are much more established, the board have gone through their rigorous treasury management and strategic objective process,” Mr Cleary said.

“So this year we’re seeing that skew to ESG issuance in the capital markets, and we will see as we go through the year a stronger skew to ESG issuance in the loan space as well. It’s definitely got momentum.”

Some sector commentators have suggested that, in time, there could be an implicit penalty in not adopting sustainability-linked approaches – a belief shared by Mr Cleary.

He said: “My view is that if you go forward three to five years, having SLL KPIs in your financing agreements – regardless of the market – will be the norm. If you haven’t got them in, then obtaining that finance may be more of a challenge or may be more expensive.”

He added: “As we look forward, lending decisions will be based around the traditional credit metrics, financials, operations, the strength of the management team etc, but in addition to that there will be an overlay on sustainability. Ultimately the funder’s [own] cost of capital will be determined by the nature of the lending as well, so therefore appetite to lend, quantum and the price will all be impacted or influenced by the sustainability of the client base. This is potentially quite a shift from the current position.”

As to Lloyd’s own SLLs, Mr Cleary emphasises that clients achieve a “genuine discount” compared with a standard loan, if they successfully fulfil the required KPIs. However the percentage of the pre-agreed discount itself is assessed on a case-by-case basis.

“Appetite to lend, quantum and the price will all be impacted or influenced by the sustainability of the client base. This is potentially quite a shift from the current position”

In setting what the KPIs are, the bank goes through a “rigorous process” to ensure these are appropriate and representative of “a genuine aspiration of the association” that is both achievable and “stretching”, he said.

“Our ask of associations is to make sure that sustainability is at the heart of their organisation and it’s not just a department or team that sits down the corridor retrofitting properties and once a year reaches out for an update from finance.”

Sector health

Asked about the sector’s current state of health a year on from the first lockdown, Mr Cleary’s view is that it has been “incredibly resilient throughout the pandemic”.

“If you look at things like arrears and repairs and maintenance, I think ‘hats off’ to the sector. They’ve done a great job and a lot of that has been about supporting their tenants.”

The capital markets are another indicator of this strength, he added. “The market issuance [for housing associations] has remained incredibly robust at very low long-term rates – so you know banks, bond and private placement investors have all got appetite for the sector, which again underscores how well it’s handled the pandemic.”