Will you lead or lag? Time to play your ESG trump card

Be a leader in ESG

When it comes to accessing competitive financing in the sector, the new trump card to play is being a leader not a laggard in Environmental Social Governance (ESG).

In recent years a flurry of organisations across a range of sectors have adopted ESG principles through the significant growth of sustainable finance loans. From 2016 to 2020 the market saw a 272% increase in ESG linked and green loans.

We explore what the future might look like for Housing Associations to access finance and what can be done to position yourself ahead of the competition. If your finance team is not au fait with ESG, and what this means for future debt capacity, it is time to get up to speed.

Global legislative environmental social governance reporting requirements are growing as governments seek to meet targets set in the Paris Climate Agreement. In the EU, the revised Non-Financial Reporting Directive requires large entities and groups to disclose information on their development, performance and position, and the impact of their activity relating to ESG and other matters. In the USA, the Securities and Exchange Commission has proposed extended measures to enhance financial disclosures to include ESG. Additionally, the UK Government and the G20 is pushing all UK premium listed companies to adopt the principles of the Task Force on Climate-related Financial Disclosures (TFCD) by reporting on their climate related risks by 2022, with full adoption and mandatory reporting expected for all by 2025. Is this all a sign of the tidal wave coming to the housing sector on increasing reporting requirements?

We have seen radical steps in recent years with large co-operations such as BP writing down assets by £14bn in an attempt to clean up their act, recognising the value of crude oil and gas will fall as demand drops during the transition to net zero. This is one of their steps to becoming a more diversified, resilient and lower carbon company.  It is steps like this that institutional investors want to see.

The ESG landscape for the housing sector

Like insurance firms, investors are looking at risk more holistically, including an organisation’s exposure to environmental, social and governance risks, and what is being done to mitigate them. Investors are looking to not only protect their exposure to high-risk investments but boost their environmental credentials by investing in organisations which demonstrate best practice with ESG and risk management.

Within the housing sector is a significant increase in the issuance of green finance products and sustainability linked loans. The funding journey to net zero will be a mixed approach for most Housing Associations, without reliance on a single source.  For Housing Associations looking to diversify their net zero funding strategy, what will accessing debt finance mean for finance, risk and governance teams over the next 5 years?

Those without a robust ESG strategy will struggle to access funds and at competitive rates. In the future this may even become a non-negotiable item. We’ll see more and more banks relying on a housing association’s ESG rating to inform their investment decision making process. Housing Associations which do not stay ahead with ESG, risk being unable to diversify their financing strategies, with the spectrum of future growth opportunities narrowing.

Beyond accessing competitive borrowing rates, there is a vast competitive advantage to be capitalised on, such as attracting the best talent. With younger generations of staff, ESG factors are more than just a consideration; they are a way of life and a key component of their belief system. Organisations that show a commitment to ESG factors will be better positioned to recruit new talent who in-turn bring fresh ideas and innovation.

For those wanting to lead, what can be done to “get your house in order” to achieve excellence?

Executives at Housing Associations should start answering and acting on the following questions:

• Do you have an ESG strategy and has it been externally certified?
• Does your strategy fully consider the 10 themes in the ESG criteria set out in the UK Social Housing ESG white paper?
• Do you have dedicated resources to drive the implementation of your ESG strategy?
• Who is responsible for updating your strategy at regular intervals?
• Who is responsible for setting and signing-off KPI’s?
• Has a governance structure been set up to help manage ESG related decision making and risk & issues mitigation?
• Is there a robust risk management process in place to support ESG related matters?
• Are there processes in place to capture the data required for ESG reporting?
• Do you have the technology in place to help facilitate data capture?
• Do you have resource in place to provide quality assurance support on the data captured?
• Have your staff been trained from top-down so everyone understands their role in achieving the ESG KPIs?
• Does your borrowing strategy link to your ESG strategy in terms of long-term borrowing plans?

Ranked against your competitors, a decision needs to be made. Do you want to lead or lag? 

Written by Annabel Gray, Sustainability Lead at Altair Ltd.