A recent virtual forum for members in the UK involved in financing and future-proofing social housing generated some great insights and topics for discussion.
Led by Peter Lewis, group director of resources, Cartrefi Conway, the discussion was based on how to embed the Sustainability Reporting Standard (SRS) for Social Housing, which was launched in November 2020 by the ESG Social Housing Working Group, a unique collaboration of housing associations, banks, investors, service providers and impact investing organisations.
As one of the first adopters of the SRS, Lewis talked about how adopting this standard and being more conscious about environmental, social and governance (ESG) becomes a journey that:
He explained how there are 48 different strands to the SRS, which at first might feel daunting but are all important factors in turning housing associations in the right direction in terms of long-term performance because:
‘once you actually look at it and consider all the positive outcomes the standard creates for you and your stakeholders, you realise that some of things you might already be doing some of, but you also discover things that you should being doing today and aren’t for the benefit of our tenants.’
Lewis advised to keep it simple and avoid over complicating the adoption of SRS. Most larger associations said it made sense for them to address all 48 strands from the start to avoid getting into the habit of ignoring the harder-to-do ones, which often reap the most benefits. Lewis added:
‘Whilst those disclosures will not always be perfect, it becomes easier as you go. The smaller associations just have to think about how to adopt it in the most effective way and be practical about it, choose the ones that are bound to make the most difference [in terms of better financing costs, meeting stakeholders needs, etc.] first,’ he explains.
All of the participants attested to the benefit of lower borrowing costs, but also to the fact investors and lenders are moving towards these more and more, so it will become difficult to finance in the long-run without adherence to ESG criteria. Lewis referred to his organisation getting approval for Lloyd’s first housing association loan linked to the SRS. The more efficient financing helped them to think more creatively about the business. For example, they started investing in digitalisation projects for its tenants and now plan to expand its portfolio from 4,000 to 5,000 homes within the next few years. Audits costs to prove their actions can add up, but Lewis stressed that the standard has improved the value of their business significantly for the long-term.
‘We developed a working group at the start to see how we would implement this and review the effects, and it really has changed our thinking of how we do things. For example, we have created an enterprise separate from our core housing one that looks after our social impact and tries to bring people into work and support communities in a wider way,’ he adds.
John Butler, policy leader at the National Housing Federation, said there are now 59 housing associations that have adopted the SRS and will have had reported on most of the core 32 strands by the end of September. He referred to the way the standard has got housing associations to operate more efficiently, particularly by encouraging cross departmental collaboration in gathering and analysing the information and getting more serious about environmental impacts and decarbonisation.
‘From the investment perspective, housing associations as a whole already do the S and the G, it’s the E where we need to improve and as the trade body we have been doing a lot of work to get there. This standard is helping us as a sector come together and although it is going to be a long road to 2050, this standard helps us tell our story. We will always push for the regulators to make this mandatory, but it is likely to become compulsory due to collective action from investors and lenders,’ Butler explained.
George Flynn, vice-president of financing and risk solutions at NatWest, attested how there has been a significant increase in sustainability-linked loan facilities in the social housing sector; indeed, across both public and private sectors. However, he pointed out that the E, S and G need to be more aligned and proven if they are to attract investment and reap the cost-savings opportunities of adopting the SRS. He says the:
‘funding question’ comes up in every transaction they do, but that the savings the housing association gets varies case by case depending on the different KPIs involved and that the environmental piece along with health and safety are currently proving to be the most challenging and pressing areas in this sector.
‘Social and governance are quick wins for the housing sector, but investors are still keen to understand exactly what that looks like and will be looking at gender pay gaps and diversity at board and executive levels and all sorts of other different types of targets that are very important and are featured more increasingly in sustainable-linked bonds than they were before,’ he explained.
Earlier this year, the Loan Market Association released updated guidance on sustainability linked loan principles in terms of mandatory verification of KPIs and reporting in terms of looking at expanding the list of social and governance matters.
‘It is a developing space but annual audits and reporting cycles are crucially important here, so any guidance is an added cost-benefit analysis that ultimately from the investor and bank perspectives is viewed very favourably and aligns with what we want to see in terms of our sustainability targets. Investors are telling us it is what they want to see in terms of structuring of transactions. The dynamics around pricing benefit do vary and I think naturally as investors get more up the curve on sustainability the pricing advantage for a very high quality sector in terms of the single A space is going to be more marginal than say the price and benefit of a transition bond,’ he explained.
Flynn touched on the fact that it is a journey for housing associations to get on and learn as they go in setting targets and proving progress. He said the SRS framework has already been accepted across all stakeholders since it is more effective and efficient than questionnaires or surveys.
There is also the fact that it requires collective action if it is to lead to lasting change and cost-savings.
‘It is all very well and good having a framework that works for the housing association space, but if it doesn't work for the investor base, then it becomes kind of an additional administration and doesn't have as much meaning so we brought in a number of the largest players in the investor community to look at that as part of their investment criteria. It doesn't mean it's all they look at, but it's a significant portion of what they look at, because what you were seeing before is effectively investors sending out their own bespoke questionnaires to clients, which were taking an enormous amount of time to complete, and wasn't the most effective method in terms of the association articulating their story when you've got four or five different questionnaires flying around,’ he notes.
This alignment with all stakeholders has been a key driver in transactions tied to the SRS because although it is a treasury led process it requires collaboration between everyone involved to make it a meaningful standard, so also with suppliers, tenants, and the developers. Flynn talked about how the bank assesses borrowers in this respect, including how the housing associations themselves do due diligence on third parties and present their reporting.
Attendees also joined in to ask about how the SRS helps add more value to the sector and indeed proves how important the accountancy profession is to achieving sustainable goals and managing the transition risks that come along the journey. Andrew Howarth, Chief Financial Officer at Housing 21, said not to chase the SRS because you think you're going to get cheaper money.
‘I think the SRS is a fantastic way of us telling the story of social housing. The NHF has improved immensely over the last ten or so years in helping us do that, but now having a standard framework for us to do that adds an enormous amount of value for us as a sector.’
He also advised other attendees not to make it too difficult and to focus first on a simple mapping exercise.
Gloria Yang, deputy chief executive officer at Origin Housing, asked whether the 32 core strands would eventually be required in annual accounts and how the adoption of the principles should be checked.
The panel responded by saying that the way things are evolving they expect regulators to eventually make this mandatory. Everyone agreed auditors are likely to resist since even though this gives an extra fee for them, it also puts an increased onus on them.
Nevertheless, it is clear the SRS believes it makes the most sense to include the disclosures in the annual accounts, so it will be interesting to see the development of the standard over time and how the different associations use it. For the meantime, how they get it audited and checked in terms of loan terms and performance varies.
The hour discussion sped by and in the end the Group decided this thought-provoking call demanded further digging, so there was an unanimous decision among the attendees for ACCA to organise another session - this time inviting some members from regulatory bodies and the construction sector to share their insights on the SRS and how they see it forcing change in the housing association sector.
Rachael is head of risk management and corporate governance for Professional Insights at ACCA.