Social housing unites to launch sector ESG initiative

Clarion and Ritterwald have both been confirmed as members of the advisory group, and the initiative will consult the Ritterwald framework for measuring green and social dimensions of affordable housing, as stakeholders collaborate on creating a bespoke UK-centric approach to reporting. It will also consider how to incorporate and measure ‘governance’ criteria, the third aspect of ESG.

Phil Jenkins, managing director at Centrus, said: “There is a lot of best practice out there in different parts of the market, in Europe and other areas, so to the extent that we can draw on some of that, and tailor it to the specifics of the housing association industry, all the better.

He added: “[But] there are specific nuances for the UK housing sector that would need to be bespoke to any such framework.”

Mr Jenkins said that the partnership had grown out of a desire to equip the sector for the “juggernaut of an issue coming down the tracks” as investors grow their requirements within ESG.

Other core members of the advisory group are registered providers Optivo and Sovereign; advisors Savills and Trowers & Hamlins; and representatives from the investor community including Insight Investment, M&G Investments, Big Society Capital and the recently launched Impact Investing Institute.

Positive outcomes

Sarah Forster, chief executive of the Good Economy, said that a shift towards assessing the “impact” side of private capital, rather than pure financial return, has brought ESG factors to greater prominence in UK social housing, for traditional providers of sector debt and newcomers.

She attributes this to two factors: first, the “mainstreaming of ESG integration across all forms of investment” driven by, for example, the new stewardship code, which requires social and environmental considerations to be taken into account. This is the main driver for larger investors.

The second is the emergence of impact investing – investors intentionally seeking to contribute ‘impact’ alongside delivering financial returns. This has shifted the focus from risk and reputation management, or “avoid harm”, towards social and environmental outcomes.

Ms Forster said: “Private capital has a role to play and has traditionally played a role in the housing market, but [there is a growing question of] how do we hold that capital to account?

“Agreeing standards, industry-wide standards of ESG and impact reporting, brings transparency and accountability to the market.”

In line with the increased interest, HAs are increasingly being sent ESG questionnaires from both new and existing investors, at times taken from the corporate world.

Eventually, the project hopes to agree a set of standardised criteria and measured data across a range of ESG and impact measures, specific to the housing sector, which could make this process more efficient. The work will not amount to a recommendation on how the metrics are accredited, or by which third party they would be arbitrated, but could leave the door open to participants to pursue these options.

Towards the end of the project, there will also be discussion about how to develop the standards and promote adoption over the long term in consultation with investors, housing providers and industry bodies.

Investor demand

Investor interest in ESG has mounted in recent years, with factors such as changes to pensions trustee reporting that came into effect in October encouraging interest from domestic investors, while European issuers and investors are seen to be leading the charge on ESG.

Mr Jenkins said that for UK HAs, the primary demand for ESG reporting is coming from the sector’s more established investor bases, in the UK and US market, as opposed to European investors who have played a comparatively small role in sector to date.

But he added: “That’s not to say it wouldn’t be a good thing for more of them to come in.”

The advisory group is agnostic about the types of debt that might be sought – from sustainability-linked loans to capital markets transactions using ESG wrappers.

Mr Jenkins said: “We are starting more with the core proposition, which is debt issued by housing associations. It may be in bond format, it may be in loan format, it may be in private placement format, and over time it will build out from there.”

Sector commentators have previously suggested that the sector performs well on the ‘social’ and potentially on ‘governance’ aspects of ESG, but may need to work harder on proving its ‘environmental’ credentials. But Ms Forster, Mr Jenkins and Ms Hickey believe that a new approach should accommodate the three ESG principles holistically.

Ms Hickey said: “We feel engagement is important, so we will see what the participants feel works, but at a personal level I would keep the three – I think there’s a strength in doing that.”

Benefits

On benefits for the sector, the partners agree that the approach should, at a minimum, create efficiency for HAs – for example where investor questionnaires are concerned. It could also provide investors with further tools to compare and contrast the profile of associations.

Mr Jenkins said: “It’s about having a recognisable set of metrics and measures that investors are able to use to measure one housing association issuer against another to say ‘how well do we think they’re performing?’.”

Ms Forster added that there could be “potential tensions” between a high social value rating and a high credit rating. “I think these sorts of tensions need to be made transparent and managed. It may be that some investors are more driven by impact.”

In time, the adoption of ESG reporting standards could also impact pricing, Ms Hickey said. She added that the approach is about increasing the “scale and efficiency of capital coming into affordable housing”.

She said: “It’s [about] making sure we’re working with the right investors, aligned with our long-term goals.”

Hear Sarah Forster and panellists from Ritterwald, the Impact Investment Institute, Big Society Capital and many others speak at the special afternoon stream ‘Impact investment and ESG in UK social housing’ at the Social Housing Annual Conference on 4 December in London