UK social housing should prepare itself for swelling numbers of investors seeking impact investment over the next few years, the chair of a UK government-backed investment board has said.
Karen Shackleton, deputy chair of the Ministry of Justice’s strategic investment board, said that a recent poll of pension funds by impact investment initiative Pensions for Purpose had found that 90 per cent of those surveyed want to be investing ‘sustainably’ in three year’s time.
Ms Shackleton, who is also director of Pensions for Purpose, said: “That’s a massive swing of capital that will be flowing into impact intentional investments over the next three years, and I would encourage you to think about that and be prepared.”
Speaking at the Social Housing Annual Conference in London on Wednesday (4 December), Ms Shackleton said lack of knowledge is a primary hurdle to pension funds allocating their cash to investments like social housing.
“More education of pension trustees is really needed if [we are] going to mobilise capital into areas such as social housing.”
She added that the sector also needs to ensure it communicates its suitability to meet the needs of pension trustees around inflation-linked cash flows to help meet pensions liabilities.
“Remember to align your message with what [funds] are looking for,” she said.
Jamie Broderick, working group lead for the recently launched Impact Investment Institute and a former UK head of wealth management for UBS, said that the social housing sector is uniquely placed to launch a social bond market in the UK.
Mr Broderick said: “[Social Housing] is the only sector I think that has the financial credibility and the size and the social outcomes that would create a credible and live social bond sector, and then investors would know that they can indeed build sustainable portfolios including the fixed income space.”
“[Social Housing] is the only sector I think that has the financial credibility and the size and the social outcomes that would create a credible and live social bond sector” – Jamie Broderick, Impact Investment Institute
Mr Broderick said that, to date, much of the focus on sustainable and impact investing has been on equity, but “one of the neglected areas is fixed income”.
This, he said, could help sustainable or impact investors to meet the requirement of “additionality”, in terms of making genuine impact through providing new capital.
“[With fixed income], people issue new debt on a regular basis and so this helps the additionality issue, this [is] new capital coming into the market”.
Mr Broderick pointed to the global rise in sustainability and social bonds issuances over the past two years, which – while occupying a much smaller proportion of the environmental, social and governance (ESG) debt market than green bonds – has grown at an even faster rate.
Issuing debt as social bonds could help social housing providers to expand their investor base beyond the traditional providers of capital to the social housing sector to include socially oriented investors outside the UK, he said.
He added that, with so few social bond issuances at present, adopting the label would help “broadcast the social value” of the UK sector, but the novelty of the label could also draw attention to individual issuers.
“There are pension funds, by way of example in Europe… that are very interested in populating portfolios with social investments, and unless they are very closely acquainted with the social housing sector in the UK, social housing debt issuance is probably not on their radar.”
But, speaking on a later panel session, Matt Cooper of Places for People sounded a note of caution on the necessity of adopting the labels. He said that his organisation is yet to see a case of an investor saying they could not buy its bonds because they were not issued within an ESG format.
“If that changed then we’d have to [look at it]. But no one’s saying that. The sector’s got a good story to sell, [investors] are buying our bonds and they are they sticking it in ESG portfolios and they have been since they started thinking about [ESG], so this is nothing new.”
Pricing
The issue of whether ESG labels could bring any benefit in pricing remains a matter of debate.
Mr Broderick said that any pricing advantage was likely to be marginal, in the manner of three to five basis points. “I don’t think a finance director should be looking for a significant pricing improvement – it’s much more about widening your investor base,” he said.
On a panel entitled ‘Meet the impact investors’, Dominic Brindley, head of public sector and structured asset finance for NatWest Markets, said there are indications that a label could make a difference. Citing a survey of more than 50 investors completed recently by the bank, Mr Brindley said that social housing and local authority credit had accounted for the second-highest sector that investors wanted to see adopt the format of green or social.
He added: “From the perspective of pricing, 35 per cent [of those surveyed] see… [issuances] up to 10 basis points tighter [as] the impact of issuing in that format.”
Sarah Forster, chief executive of social impact advisory The Good Economy, agreed that ESG is becoming more of a concern for existing institutional investors.
“Even the traditional lenders – the L&Gs, NatWest, Barclays – are now, because the stewardship [rules] are now looking at investing through an ESG lens, even in housing,” she said.
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