If the acronym ESG isn’t yet familiar to Scottish registered social landlords, then it soon will be. “Environmental, Social and Governance”, are three key aspects of organisations and their business models which can help deliver sustainability and a positive impact on communities and the environment.
In the world of finance, investors and lenders have for some time been screening investment opportunities and making investment decisions according to a set of ESG standards – environmental criteria consider how a business affects the natural environment; social criteria examine the relationship of the business with its employees, suppliers, customers and the communities within which it operates; and governance deals with the leadership of the business, its board structure and membership participation.
Businesses which have a commitment to ESG principles and can evidence that they meet these standards, are more likely to attract investment or to have access to a wider pool of potential investors.
Financial incentives to meet ESG principles
Lenders to the social housing sector are also increasingly having regard to ESG considerations in their credit assessments – doing so is likely to enhance the lender’s own ESG credentials, but also provides an opportunity for RSL borrowers. We have seen at least one major high street lender to the sector quoting loan terms which include an ESG incentive – if borrowers commit to an agreed set of ESG-related KPIs or outputs, and if these are achieved on an annual basis, then the borrower pays a lower interest rate margin. Conversely, if the targets aren’t met, then the margin goes back up.
To most RSLs, their boards and their senior staff, accepting this sort of incentive will be a no-brainer – after all, are ESG principles not a natural fit with how RSLs are structured and what they do? Focussed on charitable objects, delivering on energy efficiency and low-carbon targets, being great places to work, non-profit distributing, and improving communities for the benefit of those who live there. However, just assuming that you will easily tick the lender’s ESG boxes while barely trying is unlikely to be enough – the agreed KPIs or outputs will need to be specific and measurable, so that achievement or out-performance can be clearly evidenced.
Sustainability Reporting Standard
To assist, the ESG Social Housing Working Group published a report last November on developing a Sustainability Reporting Standard for Social Housing, which is intended to be a voluntary disclosure framework for housing providers to report on their ESG performance in a transparent, consistent and comparable way. A Sustainability Reporting Standards Board is being set up to oversee the implementation and adoption of the Standard.
The Standard covers key themes relating to housing providers, including:
- Under the Environmental heading, climate change, ecology and resource management;
- Under Social, affordability and security, building safety and quality, resident voice, resident support and placemaking;
- Under Governance, structure and governance, board and trustees, staff wellbeing, and supply chain management.
In turn, these key themes are made up of further, more specific and detailed criteria which are specific to the structure and activities of housing providers, and which then allow numbers of percentages to be applied as targets.
While it is still early days for this standard, and how it will be adopted in order to inform an organisation’s specific targets and KPIs, a lot of work has already gone into it and it seems the obvious place to start if a RSL is looking to agree a set of targets with a lender, or indeed targets against which to measure its own performance more generally. And perhaps that should be the real reason for adopting the standard and reporting against it – not just to shave a few basis points off an interest-rate margin, or as a green-credentials cosmetic exercise, but as part of an organisation-wide embracing of these sustainability principles, in order to be a force for good, and to be able to evidence this.
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