Over the past 18 months, green and sustainable finance has become a major source of funding to housing providers. Whilst there have been isolated examples of green financing being used in the sector previously (such as Cross Keys green bond and The Housing Finance Corporation Limited's £400 million green loan way back in 2006), it is only recently that housing associations have embraced green and sustainable finance as key to achieving their development goals.
Green and sustainable finance is, after all, a natural fit for the social housing finance sector. For years, housing associations have been excellent corporate citizens, focusing on areas which can easily be badged as ESG (environmental, social and governance). Housing associations provide affordable housing to those who need it, they help support tenants into employment, improve the energy efficiency of their homes and help their tenants with fuel poverty. Housing associations are involved in placemaking, building communities people truly want to live in and they understand the value of designing developments with biodiversity and green spaces in mind. However, the message from funders is that it is time for housing associations to start articulating their story better when it comes to their ESG credentials.
ESG considerations have leapt to the top of the list of investors' priorities. There is a huge drive towards green and sustainable finance, which has been spearheaded by pressure from European investors. The introduction of the Stewardship Code which was launched in October 2019 requires pension trustees and asset managers to consider ESG factors across all asset classes when making investor decisions. Funders have realised, rather belatedly, that they should be asking their borrowers about their ESG credentials.
This combination of factors has lead to a huge influx of green and sustainable finance products being offered in the social housing finance sector. There is huge investor interest in green, social and sustainable finance with a number of funds having a mandate to invest in green/impact investment products. A recent survey of fund managers carried out by US private bank Brown Brothers Harriman revealed that 74% of global investors plan to increase their allocation of ESG assets over the next year.
We've been delighted to act on some innovative green and sustainable financing transactions in the sector over the past year.
Cartrefi Conwy entered into an innovative refinancing transaction where margin reductions were included in their loan facilities where they meet a range of environmental and social KPIs; a first in Wales. These KPIs are linked to criteria taken from the Sustainability Reporting Standard for Social Housing which was launched in November 2020. The Standard (the development of which Trowers was involved in) consists of a set of criteria (split into standard and enhanced criteria) on which all housing associations, from the largest member of the G15 to the smallest association, will be able to report on an annual basis. The idea behind the Standard is to provide funders to the sector with transparent, comparable data that they can use to measure an housing association's ESG performance. Cartrefi Conwy were the first to enshrine the Standard in a loan facility.
Aster Group established a £1 billion medium term note programme in accordance with the Framework for Sustainable Finance (drafted in accordance with Social Bond Principles and Sustainability Bond Guidelines) which allows them to issue sustainability notes. The deal marked only the third ever sustainability bond issued by a housing association.
We have put in place a number of sustainability linked loans for housing associations (where the proceeds can be used for any purpose but the margin is linked to ESG metrics set by the housing association). Example ESG metrics include improving the median gender pay gap and improving the EPC rating of homes.
Recently we have assisted with Believe Housing's private placement from L&G which was the sector's first sustainability linked private placement with metrics linked to energy transition. We also acted on a green private placement for a housing association which allows for them to use the proceeds of the placement for "green spend" – a first for the sector.
It is hotly debated whether housing associations should enter into one of these finance products rather than going down the route of securing debt from traditional lenders or look to standard bonds in the capital markets which can result in a pricing benefit. We are often asked whether it's "worth" housing associations considering entering into, for example, a sustainability linked loan or a social bond given the extra consideration that will need to be given to setting the relevant ESG metrics. It is important that the metrics set are both meaningful and aspirational to the housing association to avoid suggestions of green washing. Housing associations need to consider whether they have the data to hand that will allow them to record their performance against the chosen metrics or whether new systems need to be put into place.
Our view is that there is no question that the huge investor appetite for green and sustainable finance products is creating pricing tension in the sector resulting in a cost benefit to housing associations. But more importantly given how much emphasis funders are placing on ESG considerations, it is likely that in two years time we won't be talking about "green finance", we will simply be talking about "finance" as ESG metrics will become part and parcel of any finance product. Housing associations who are ahead of the curve and place ESG considerations at the heart of their business are likely to be much more attractive to investors.