Where does ESG finance come into retrofitting social housing?

Blog by: Luke Cross, Director, Social Invest

ESG and sustainable finance are so last season, don’t you agree?

No, me neither. In actual fact, ESG and sustainable finance are now part of the landscape for the UK social housing sector.

We are beyond the idea that ESG is some sort of fad, that it’s simply the latest iteration of CSR or even that it is something that housing associations don’t need to work at because it’s ‘in our DNA’.

The growth of the sustainable finance market more broadly is a good thing on multiple levels. This includes a fundamental shift in direction for the financial services industry compared with where it has been historically, a drive for more accountability and transparency across finance and business (including calling out greenwashing) and the opportunity for HAs to showcase their ESG credentials and risk management, where they are heading with sustainability (holistic and not just environmental) and how they can improve as businesses.

Making existing buildings greener and fitter for the future sits at the intersection of the three pillars of the E, S and G – from the energy efficiency and performance of homes and buildings, to the wellbeing of tenants living in more efficient, warm, dry and cheaper to run homes, and the ability to measure and manage data and information that’s really crucial to driving improvement, and in demonstrating what’s being done and how.

On the finance side, lenders are increasingly finding opportunities to work with landlords on bespoke ESG-linked deals that can deliver some discounts, and play a role in both moving HAs towards sustainability goals and encouraging accountability through KPIs linked to EPC C targets and other green criteria.

HAs of a certain size can tap into green private placements or design Sustainable Finance Frameworks that link debt capital markets funding to the ‘greening’ of the organisation and its developments.

And there is also the opportunity for lenders to evolve this market and introduce more products to the sector that promote greater discounts.

But as we know, competing financial pressure are bearing down on interest cover covenants (forecast to dip below 100% by the RSH in the current period) and retrofit doesn’t deliver a cashflow as new build does, so funding will often go into the ‘for corporate purposes’ box, meaning it will then flow into various parts of the business.

ESG finance alone will not solve the retrofit challenge.

We need a blend of funding and finance to answer what was once framed as an £100bn question, but in reality will be far more given inflation and interest rates have gone.

To help the sector on its way, The Housing Finance Corporation (THFC) and engineering consultancy Buro Happold set out a roadmap for funding retrofit. This essentially called for three key components: economies of scale, to reduce per unit capital cost; matched grant funding, to reduce the housing association’s own cost; and government guaranteed debt funding, to reduce the cost of borrowing to fund initial retrofit investment.

Given the scale of the challenge and need for government support, the sector needs to ensure it is taking every opportunity that government gives it – not least via the Social Housing Decarbonisation Fund.

But there are also new ways of thinking and potential partnerships coming into the picture too.

This includes via new players in the affordable housing sector, including the likes of Octopus Real Estate, who are looking to leverage their sister company, Octopus Energy, to deliver Zero Bills homes with developers in this sector and roll out solutions for existing homes too.

HACT’s retrofit credits scheme, is aiming to provide carbon credits produced on the back of works to decarbonise housing stock, which can be sold onto investors and organisations wanting to offset their own carbon by funding emission-reduction projects.

Coalitions and collaborations are crucial too. NatWest Group launched a ‘Sustainable Homes and Buildings Coalition’, with British Gas, Worcester Bosch, and Shelter, and have been running energy efficiency pilots and calling on government and industry to help roll out solutions at scale.

The truth is that there is no single solution, or single organisation, that can deliver on this alone.

But ensuring that the sector is seizing all opportunities it can – whether it be in finance and funding, partnership or technological solutions – is ultimately what will enable it to tackle the retrofit challenge.