How can the social housing sector make the most of sustainable finance?

Orbit’s retrofit of 69 existing homes in the Stratford-on-Avon region and Nottingham Community Housing Association’s BAME-linked loan facility demonstrate the practical applications of ESG funding

ORBIT GROUP

SUSTAINABLE FUNDING: £1.45M SOCIAL HOUSING DECARBONISATION FUND

USE: CARBON REDUCTION DEMONSTRATOR PILOT

In partnership with Stratford-on-Avon District Council, Orbit Group was successfully awarded £1.45m in January 2021 via the government’s Social Housing Decarbonisation Fund (SHDF) to retrofit 69 of its existing homes in the region.

As part of the deal, which was a local authority-led bid, Orbit invested an additional £2.2m into the project. It was one of 19 demonstrator pilots backed by the government with the aim of determining what carbon reduction measures could be undertaken on current housing stock across the country.

“The key thing that the Department for Business, Energy and Industrial Strategy (BEIS) was trying to demonstrate was scalability in the marketplace and innovation in terms of decarbonisation,” says Jeanette Hodges, head of carbon and operations at Orbit Group.

For Orbit, this meant a deep, whole-house retrofit across the 69 homes, including fabric-first principles such as maximising air tightness via windows and doors, applying loft and external wall insulation and natural ventilation, and installing smart heating controls.

“We’re doing this large programme of works all in one go, while our customers remain living in their homes. We have just appointed a contractor, who is about to start on site, with work due for completion by June next year.

“Planning and communication is key. Critical to the customer is what the changes will look like, how does technology such as smart thermostats work, and will their energy bills be more affordable.”

Explaining the bidding process, Ms Hodges says it was a competitive process, with £60m available as part of the overall funding pot, which they had to apply for last October.

“Critical to the customer is what the changes will look like, how does technology such as smart thermostats work, and will their energy bills be more affordable”

“Eligible properties all had to be in Energy Performance Certificate (EPC) Band D or below and then the BEIS criteria stipulated you had to get them to an EPC Band C and [an annual energy demand target of] 50 kilowatt hours per square metre per annum,” she adds.

An average Orbit property has a current energy demand of 202 kilowatt hours per square metre per annum, meaning the work would result in a 75 per cent reduction in energy demand usage – which Ms Hodges describes as “tight” and “demanding” criteria.

Such government funding also requires Orbit to follow the British Standards Institution’s latest energy efficiency specification and guidance (known as PAS 2035). This means Orbit has to use specific supply chain partners, adding another layer of complexity on the delivery process.

“This means our installers have to be PAS 2030: 2019 qualified, and our contractors have to be PAS 2035 qualified. We then have to have retrofit designers and co-ordinators overseeing the project, as well as carrying out a full energy assessment survey to identify what measures each property needs installing.”

There have been further challenges to turning some of these energy efficiency targets into a reality, including the current market volatility being felt across the country, with contractors struggling to get hold of certain materials and prices rising as a result.

Ms Hodges explains: “We planned to include air source heat pumps, but market volatility has meant that prices came back extremely expensive.

“For us, it was really important that we insulated the 69 homes and protected those families, but we felt it wasn’t good value to spend £16,000 on a heat pump today, when we knew in 12 months’ time it would be £9,000.”

The government is releasing further funding pots in phases. The first of these (now the pilot funding has been allocated, with work under way) totals £160m. Orbit is currently bidding for this funding with a local authority partner.

A further £800m covering the period 2022 to 2025 was also announced in October.

NOTTINGHAM COMMUNITY HOUSING ASSOCIATION

SUSTAINABLE FUNDING: £50M ESG LOAN

USE: BUILD 2,100 HOMES

In January, Nottingham Community Housing Association (NCHA) completed its first loan linked to environmental, social and governance (ESG) principles, which it will use to build 2,100 homes across the East Midlands over the next five years.

The £50m revolving credit facility (RCF) is with NatWest and is linked to two ESG targets, or key performance indicators (KPIs), which each have interest rate reductions attached if the target is met.

The first is tied to improving the energy performance of NCHA’s existing homes to above an EPC C standard.

The second target is described as the more “unusual” out of the two by Naomi Dobraszczyc, director of finance and resources at NCHA: a diversity metric linked to increasing the proportion of NCHA’s BAME managers from 10 per cent to 13 per cent.

“That will take us almost where we want to be in terms of our longer-running [BAME] target,” she explains.

“Our end goal is to get to 14 per cent, which would reflect the proportion [of BAME people] within the general population across the East Midlands, which is our operating area.

“That 14 per cent target has been a long-running commitment within our [equality, diversity and inclusion] strategy, so we weren’t asking the board to sign up to anything new and we weren’t creating new targets. But we felt it was quite important that we were going public and putting our money where our mouth is in terms of making a real statement in relation to our ambition in this area.”

The group will detail its performance against the two KPIs in a note in its annual accounts, which will then be given to the lender as independent verification that NCHA has or hasn’t hit its targets. The housing association will start measuring its achievements at the end of the first year of the loan.

“Our end goal is to get to 14 per cent [proportion of BAME managers], which would reflect the proportion [of BAME people] within the general population across the East Midlands”

Ms Dobraszczyc says the five-year term of the loan was significant since it enabled NCHA to set achievable targets over that time. “If we had a 10-year RCF, I’m not sure we would have wanted to set targets because that would have been a much longer commitment to make,” she explains.

Discussing the challenges of delivering on the diversity target, Ms Dobraszczyc, says: “If you contrast [the diversity metric] with the EPC target, we control and programme work [for the latter], so as long as we meet our targets, then we can just upgrade our stock.

“[However, hiring] individuals in roles obviously depends upon turnover, it depends upon candidates wanting to work for us, and it depends on getting a really diverse pool of talent coming in. It also depends upon retaining particular groups of people. So, there’s a sense in which people are concerned that the metric is not wholly within our control.

“On the other hand, it is an area where we want to make a change, and this is the best way to bring that about.”

She explains that if NCHA does not hit the targets, then it won’t realise the full interest rate saving, but there is no penalty. This, she says, is “really important, because what have we got to lose?”

Ms Dobraszczyc adds that while NCHA already had diversity and inclusion measures in place across the organisation, the loan has had a “galvanising” effect on the group. “We’re doing more now than we would have done if we hadn’t have made this commitment publicly.

“We’re building on the measures we had before, we’ve signed up to the race work charter, we’ve got colleague work forums in place, and we’ve got diverse interview panels, both in terms of ethnicity and gender for all of our management roles.”

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