Piers Williamson, CEO of The Housing Finance Corporation, explains how UK social housing is embracing environmental responsibilities to drive investment.
Improving the energy performance of buildings is vital to achieving net-zero emissions by 2050 and protecting the environment for future generations. This was the declaration of UK Housing Minister Christopher Pincher when he set “rigorous new energy efficiency standards” for homes as part of the government’s strategy to transition to low-carbon energy sources.
Given that the built environment is responsible for almost 40% of global carbon emissions, with 10% from embodied carbon from materials and construction processes, it is no surprise housing is on the hit list for policymakers.
Piers Williamson, CEO of The Housing Finance Corporation (THFC), says there is significant pressure on housing associations, which are responsible for 17% of the UK’s homes, to demonstrate their commitment to sustainability.
“It’s not good enough for housing associations to simply say that what they do is a social business; that’s obvious. In this brave new world where the government says ESG is important then we need to show we are sustainable. It is no longer good enough to live on reputation; you need to communicate objectively,” Williamson says.
This policy pressure translates into the need to find financial support that will ease housing associations towards sustainability.
Williamson says the cost for getting public housing up to the efficiency standard expected by government by the 2030 deadline could reach as much as £100 billion.
“There is a lot of work to be done on retrofitting [bringing public housing up to energy standards] and the housing associations have to pay. This could be as much as £40,000 per home without any upside,” he says.
Also, following the Grenfell Tower disaster in 2017, housing associations must remove all flammable cladding and ensure public housing meets safety standards.
“The sector faces a big bill around fire remediation, and it is strenuously doing the right thing to correct old building standards. This is a cost with no revenue associated with it,” Williamson says.
Best kept secret
THFC’s job is to match lenders with borrowers and while it describes itself as ‘one of the City of London’s best kept secrets’ it has still managed to provide £7.8 billion of investment to the social housing sector, working with big name lenders including M&G and BlackRock. In fact, there is no shortage of institutional investors wanting to lend money to housing associations.
Just this week, Legal & General Investment Management (LGIM) launched a sustainable DC property fund that will invest in just the projects THFC has on its books, if they can prove their ESG credentials.
Williamson says: “If the housing associations can go into bat and say what they are doing and prove they can measure it then that is a very effective way to attract finance. This is a sector with a coherent representation of what it is doing in a world that is increasingly sceptical about greenwashing.”
As part of that coherent representation, bLend, the funding company run by THFC, is the first housing aggregator to publish performance of its borrowers against the ESG criteria set out by the Sustainability Reporting Standard for Social Housing (SRS).
The standard is a collaboration of 18 housing associations, banks, investors, service providers and impact investing organisations. It is a voluntary reporting framework, covering 48 criteria across ESG considerations such as zero carbon targets, affordability and safety standards.
Williamson forces himself to use a phrase which he admits he “hates” to describe why bLend has taken the leap into sustainability disclosure.
“ESG is a journey not a destination,” he cringes. “The housing associations that have adopted SRS have the courage to say, ‘this is where we are on the journey’. They have metrics against which they can be benchmarked, and every year we will report to say where we have improved.”
Williamson admits that some data is harder to gather than others. He says that governance is the most straightforward of the ESG areas since housing associations already operate under a stringent regulatory framework.
He adds: “It is unusual sector in that – touch wood – there has been no insolvency or car crash in the 33 years we have been lending.”
The S is more complicated, Williamson says, since standardising social issues is a challenge.
“Standardisation of these outcomes will be a learning process. The standards that are set on day one will move on and evolve to reflect what investors want and what is happening on the ground,” he says.
Professionalise and standardise
But it is with environmental reporting that THFC has what Williamson says are “the most teething problems”.
“We have some of the worst condition housing in Europe. The standards for new builds in France and Germany are higher standards. And even meeting the C EPC (Energy Performance Certificate) rating costs a lot of incremental money,” he says.
However, 65% THFC’s existing stock have an EPC rating of A, B or C which compares to a sector average of 60%. Further, 95% of new builds in THFC’s group of borrowers have EPCs of A or B which represents an improvement on the average of 83% for new builds last year.
It is too early for Williamson to say whether publishing SRS will drive investors to bLend’s borrowers, but he is optimistic.
“The SRS will be positive. We are not paying lip service to ESG. It is incumbent on housing associations to professionalise and standardise what they are doing, and if they can’t do this then they are really not doing a good job,” Williamson says.
Several European lenders with “higher ESG standards than the UK” are not working with THFC’s housing associations, a fact Williamson believes will change once the SRS reports are digested and a sustainable bond framework is in place.
THFC has converted all its outstanding debt to social bonds and reports to investors according to a framework aligned to the International Capital Markets Association (ICMA) principles and SRS.
“We are upping our game and we have a sustainable bond framework which is about to go live. We are also thinking about the economics of retrofit finance.”
However, he concludes: “That is part of tomorrow’s job. Right now, we are focusing on demonstrating what housing associations have to offer the ESG world.”