In our first blog, Dr Arthur Krebbers, Head of Corporate Climate & ESG Capital Markets, determines that social housing providers have much to gain from being open about their decarbonisation journeys as the climate emergency means that no housing association’s net-zero journey takes place in isolation: each stakeholder has an interest, including those that provide financing and liquidity. Dr Krebbers outlines three areas where housing associations can particularly benefit from a proactive engagement with stakeholders:  

1. Housing associations’ own decarbonisation strategy and investment agenda: With estimates suggesting that the UK will need to retrofit at least one home a minute until 2050, energy efficiency schemes are becoming a major part of a housing association’s investment agenda on their journey to net zero. At the same time, they are under pressure to set higher Energy Performance Certificate (EPC) standards on all new developments. Tapping into available expertise – such as for example those offered by the Sustainable Homes and Buildings Coalition - means HAs don’t have to ‘walk alone’ while developing a realistic, impactful decarbonisation strategy to achieve the aforementioned objectives. Debt providers can also help, not only with the financing of such energy efficiency schemes and higher EPCs, but also with their sector and sustainability expertise.  And, as the product and advisory mix has broadened, housing association treasury teams have an opportunity to support their organisation’s sustainability goals while also following the preferred mix of financing instruments.
2. Selection and structuring of ESG debt instruments:  With bond investors having started to apply a transition lens to their activities and increasingly assessing housing associations on the credibility of their overall decarbonisation plans, issuing a green or sustainability-labelled bond will likely show more than a social bond could (that does not consider environmentally impactful projects) that a housing association is committed to a green transition. Similarly, housing associations can signal their net-zero commitment through a sustainability-linked debt instrument, which could include portfolio EPC or other energy improvement targets (albeit this has been more common among housing associations in the bank loan market).
3. Reporting on sustainability performance and strategy: To proactively foster openness with stakeholders and be able to answer their diverse questions, housing association treasurers must become more confident in talking about their organisation’s green mission – seeing it as closely linked to their social ‘raison d’être’, given the major societal implications of climate change. Hence, detailed sustainability reporting (read more in the following blogs), including reporting on target achievements - or challenges experienced in achieving those targets - is essential to build a trustworthy, credible rapport with all stakeholders, and especially with tenants. Such an open dialogue, based on hard data, won’t just help the treasury function but the whole organisation as well as society. 

In the second blog, Dominic Brindley from our specialist financing and risk solutions team highlights the need for HAs to quantify the impact of their sustainability measures in order to offer full transparency to investors and other stakeholders. He recommends four steps to achieve this:

1. Assessing and reducing GHG emissions footprint: Conducting comprehensive life-cycle assessments and evaluating resource consumption provides HAs with crucial insights into managing their portfolios’ greenhouse gas (GHG) footprint. Ideally, such assessments include: 1) Benchmarking (comparing performance with industry benchmarks) and setting targets; 2) Regular audits and inspections (to spot opportunities for energy-saving measures, address maintenance issues promptly, and ensure compliance with environmental standards); and 3) Stakeholder engagement via feedback mechanisms to foster a sense of ownership and encourage the acceptance of green projects that could cause short-term disruptions to communities.
2. Managing holistic sustainable projects: Integrating sustainability objectives into portfolio analysis is vital for HAs to align their investment strategies with their environmental goals. This involves identifying and investing in projects that promote an holistic approach to sustainability such as biodiversity projects, circular economy projects, and sustainable infrastructure.
3. Setting clear ESG KPIs and targets: HAs should be mindful of aligning their targets with global frameworks such as the UN’s Sustainable Development Goals (SDGs). They should also consider how they compare at a national level to environmental performance standards (EPC ratings) and environmental design standards such as Leadership in Energy and Environmental Design (LEED) and Building Research Establishment Environmental Assessment Method (BREEAM). When setting targets, HAs should bear in mind their measurability (can HAs effectively measure and track key performance indicators (KPIs) over time?) and materiality (which KPIs have the most material impact?), as well as ensuring the targets are SMART targets (specific, measurable, achievable, relevant and time-bound). KPIs can include metrics related to ESG project topics noted in the Loan Markets Association’s (LMA) Green and Social Loan Principles, and routinely used in the impact reports of HA finance frameworks.
4. Monitoring progress against ESG KPIs: Effective monitoring permits the measuring of progress and identifying those areas that require improvement. This enables HAs to communicate the ESG benefits of their investments.

Impactful targets, digestible data and excellent reporting rarely exist without clear external standards at the outset, Tom Gidman from our ESG advisory team argues in the third blog, and outlines how to successfully internalise external standards:

1. Organising ESG data based on accessible and internationally accepted formats: Choosing an internationally recognised format is a crucial starting point as it helps with comparability. An accepted format, and the standard methodology for measuring and managing emissions data, is the GHG Protocol, which also serves as a preferred input into other systems (e.g. Streamlined Energy and Carbon Reporting – SECR, and Science Based Targets Initiative – SBTi). Apart from emissions, biodiversity and capturing appropriate metrics are rising up the agenda. This will be supported by the launch of the Taskforce on Nature-related Financial Disclosures (TNFD) next month. TNFD will provide recommendations when organisations report about their exposure to natural risks, including loss of biodiversity and ecosystem degradation. While social data has been less consistently captured, a number of systems for measuring social value are available such as the National Themes, Outcomes and Measures (TOMs) via the Social Value Portal; the Housing Associations’ Charitable Trust (HACT) Social Value Insight tool and UK Social Value Bank, as well as guidance from Social Value UK and the National Housing Federation.
2. Setting impactful targets: Once data is captured as accurately as possible in a comparable format, setting impactful benchmark targets should form the next step. Starting with emissions, the corporate community has gravitated towards a scientific approach, which is exemplified by the SBTi targets which provide companies with a clearly defined path to reduce their emissions that is aligned with the goals of the Paris Agreement: to limit global warming to 1.5°C above pre-industrial levels. In terms of key performance indicator-linked financing, SBTi targets are viewed as the gold standard for emissions targets and are well received by lenders and investors alike. As the adoption of social impact metrics develops, there are fewer benchmark targets. However, regarding diversity in the workplace, organisations could consider the 30% Club, which aims to increase gender diversity at board and executive committee level, or the Parker Review, which sets out recommendations to improve ethnic diversity.
3. Choosing the most suitable sustainability reporting standard: Finally, reporting binds the other two constituents together, while providing the opportunity to publicly align with external standards. There are a multitude of standards to opt for, such as the Sustainability Reporting Standard for Social Housing (SRS) which goes some way to consolidating reporting requirements for the sector. The SRS is voluntary and consists of 48 criteria across environmental, social and governance measures, such as carbon targets, affordability and safety standards. Many stakeholders from across the sector contributed to the SRS (including NatWest) and they look set to continue this process. SRS version 2.0 is due to launch later this year, following version 1.2 in 2022.

In the fourth and last blog in the series, Dean Shahfar from our Sustainable Finance DCM team explores the uses of sustainable finance instruments – such as bonds, private placements and loans - through the lens of balance sheet management, delivery of next-gen housing, and establishing market-facing credentials:

1. Managing a future-ready balance sheet:  Although the sustainable finance market continues to develop both in scale and in sophistication, the conversation around balance sheet management regularly comes back to “what makes sense?”, meaning how can an organisation maintain a healthy balance sheet today, and one that can also flex as the engine for its strategic goals. Having reached circa 12 per cent of total investment-grade supply in EUR, GBP and USD this year to date, sustainable finance is well tested to meet the needs of efficient balance sheet management: in public markets, sustainability features can be designated on a tranche-by-tranche basis to help meet appetite for term and to enable matching of assets (eligible projects, such as housing stock) and liabilities. Meanwhile, in the private placement market, where we have seen that green and KPI-linked facilities, sustainability and commercial features can be combined, meaning transaction structures can be carefully tailored. Finally, along with public and private transactions, sustainability principles can also be applied to short-term instruments to ‘greenify’ liquidity activities.
2. Delivering safe, secure, decarbonised homes: While sustainable finance serves as funding in the most practical sense, the resulting outcomes of the use of proceeds or sustainability-linked structures are what continue to capture the attention of those issuers and investors in pursuit of a better tomorrow. In relation to use of proceeds, these benefits are described in terms of the environment (underpinned by the International Capital Market Association’s Green Bond Principles) or society (underpinned by its Social Bond Principles), or as a combination thereof. Where principles are combined, the financing is then termed ‘sustainability’.  Indeed, this sustainability moniker elegantly captures the duality of the social housing mission: to provide comfortable, affordable homes that are also energy efficient, in pursuit of strict performance requirements. The ability, then, to deliver that combination of benefits within one financing transaction – for example in a bond or a private placement – means complete flexibility for development plans of every size. At the same time, momentum is building behind sustainability-linked financing, reaching circa 25 per cent of sustainable finance supply this year. This technology, where the proceeds are for general corporate purposes, but the margin is impacted by attainment of certain sustainability performance targets, is another means to drive societal and environmental benefits as it is an opportunity to demonstrate the positive improvements made, for example, to the energy efficiency of homes.
3. Establish, develop and embed credentials: Carefully structured, sustainable finance transactions can deliver further benefits beyond the environmental and societal outcomes, acting as a ‘loudspeaker’ in the case of public transactions by showcasing an institution’s ESG strategy. This can help issuers to stand out in crowded markets. However, issuing in sustainable finance format – including the framework, second party opinion, and eventual reporting – is no mean feat and can quickly consume resources of smaller treasury teams. Sustainable finance is therefore more than just the funding: it’s the lens to help focus strategic priorities, and the platform on which a sustainability strategy can be developed and demonstrated – and surely worth the extra work.