Greater ESG credentials scrutiny means green investors and registered providers of social housing must continue to strengthen ties, argues James Duncan, real estate finance partner at Winckworth Sherwood.
The real estate industry is not often recognised for its progressive thinking. Property is one of the most established and – in many ways – traditional investments that can be made. Yet when it comes to sustainable finance, the sector is coming on board. Sensing the opportunity for competitive advantage against peers and the risk of stranded assets that are unpalatable for occupiers on one hand and green-indexed funds on the other, we’re expecting to see the trend accelerate through the year ahead.
From the investor side, this interest is, however, dovetailed with growing scepticism over the credibility of sustainability plans. A recent study from Sensu Insight revealed that only a quarter of people take environmental claims from businesses at face value. More important from a financial perspective, the FCA’s recent consultation on greater transparency over the use of sustainable investment labels is part of a much wider trend to inject rigour and confidence into a maturing category.
With any market movement, there is a risk of being left behind. It’s particularly important in the UK that registered providers of social housing (RPs) get it right.
At face value, what’s not to like for a sustainable investor looking at the social housing sector? Indeed, many already sit comfortably as part of ESG-aligned portfolios. Characterised by a strong sense of social purpose, together with a private-sector mentality towards financial performance, many RPs should be well-placed to attract interest. However, as the market demands more evidence, they need to clearly demonstrate the implementation of a strategy that is both effective and reportable.
Establishing a frameworkFor the majority of RPs, this is not a case of starting from scratch but working to codify what is already in place. Many will already have a system for maintaining their eligibility for sustainable finance, but they must work to continue to match standards that are becoming more stringent.
Required performance levels are only becoming more demanding, with the FCA’s proposals including the publishing of pre-investment disclosure requirements that show ESG objectives, strategy and plans for stewardship. The consultation suggests that from June 2024, businesses using sustainable investment definitions should have to produce a report assessing ongoing performance and provide proof. Evidence is becoming as important as delivery itself.
The point to make is not necessarily that more environmental and social workstreams need to be brought online. Our own work on our toolkit for sustainable finance has made it clear that the challenge the sector needs to overcome is less about the E and the S of ESG but about governance.
On this front, larger providers are better equipped to make a start – with the requisite structures, reporting lines and committees in place. However, in most cases, there is a need to overlay additional protocols and safeguards to ensure ESG commitments are very visibly embedded throughout the organisation. No RP is the same and frameworks will differ, but they must now prioritise the reporting and disclosure requirements of lenders if they haven’t already.
Working in partnershipInevitably, this level of intervention is complex for many providers, but risk can be mitigated, providing a plan is in place. Requirements are growing in scale, and decisions need to be made on which commitments to strategise for now – in most cases, this includes assessing not just the applicability of ESG-related UK standards, such as the Sustainability Accounting Standards Board (SASB), but also staying alive to the regulations imposed in the US and Europe where many investors operate. Increasing emphasis on collecting relevant data and providing accurate reporting is also adding further to the challenge.
This is where a partnership approach can bring rewards. With support, registered providers can be an invaluable asset class to investors; however, unlocking them requires the investment community to play a central role. They can provide guidance on metrics and help to align the framework with corporate objectives, making it realistic and fit for purpose. By ensuring that RPs have the right governance structures in place, sustainable funds will feel more confident in their investment and that they’re delivering on their own brief.
On the other hand, the social housing sector must maintain its momentum and keep up its good work. This includes clearly showing results which is increasingly essential to securing sustainable finance. Despite economic pressures, improving practices and reporting standards must continue to be taken seriously, making strong dialogue with investors vital. It’s worthwhile for both – investors can point to products with a tangible social value, while RPs are able to access favourable terms that help them deliver for their communities.
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