Derek Hogg: Making sense of ESG
Scottish Housing Associations can hardly have failed to notice the increasing level of debate within the sector in recent times around the themes of sustainability and ESG (Environmental, Social and Governance matters).
Participation of individual RSLs and their boards in the debate has, so far, been a matter of choice. Some RSLs may have taken the view that their ESG credentials are self-evident and don’t need explicit demonstration. In relation to the “E” of ESG (which often seems to dominate the debate, albeit for obvious reasons), RSLs could be forgiven for sitting on the sidelines and awaiting developments, particularly greater clarity on the best carbon-neutral retrofitting solutions for their existing housing stock, and an indication of how these are to be funded.
However, RSLs can’t really afford to stay out of the debate for much longer – the direction of travel towards a carbon neutral goal, and the part to be played by RSLs, cannot be ignored. If individual RSLs do not embark on their own “net zero journey”, they risk being left behind by their peers, to the detriment of their tenants and other stakeholders.
The focus of ESG is all about positive impact – positive impact of an organisation on the environment, the social benefits and outputs the organisation delivers to stakeholders and communities, and how the organisation is governed, led and run.
ESG is definitely a natural fit for RSLs. In terms of environmental impact, the construction and management of housing is what RSLs do, and the housing sector in Scotland has a major influence on the environment as a whole, with there being significant opportunities to innovate and improve, and to assist Scottish government with decarbonisation, not to mention the benefits which will accrue for tenants in terms of energy efficient housing and lower fuel bills.
In terms of social impact, there are clear and significant benefits which RSLs generate for their tenants, the communities within which they operate, their employees, third party contractors and other stakeholders. In relation to the “governance” piece, RSLs in Scotland are non-profit distributing, their objectives (often charitable) are baked-in, and their structures encourage open inclusive governance and decision making.
From a funding and finance perspective, ESG criteria have become hugely important for funders and investors when deciding which sectors to lend to and invest in, choosing between similar organisations and positively avoiding certain sectors or organisations. Increasingly we are seeing ESG featuring in lending decisions within the Scottish RSL sector, including sustainable loan facilities where the RSL borrower commits to attaining agreed sustainability targets on an ongoing basis, in return for which they are rewarded with a reduced interest margin.
For those RSLs who have yet to embrace the ESG agenda, why should they bother? In response to this question, the chief executive of one of our RSL clients recently said “because it’s the right thing to do”. Certainly, it is the clear direction of travel from a global level downwards. We have United Nations Sustainable Development Goals including access to adequate, safe and affordable housing, reduction in poverty, reduction in energy consumption and tackling climate change. We have the UK and Scottish government’s targets. In Scotland, the aim is to be carbon neutral by 2045 at the latest, and this has been enshrined in the Climate Change (Scotland) Act 2019. Specifically within the housing sector, first there was the Scottish Housing Quality Standard, then the Energy Efficiency Standard for Social Housing (EESSH1) and now EESSH 2 which requires all social housing to be minimum EPC band B by December 2032.
The Scottish government’s “Housing to 2040” strategy recognises the massive investment which will be required in order for the housing sector to move to carbon neutrality, including delivering a huge retrofit programme, which is likely to require new and innovative procurement strategies, more use of off-site construction, joint working among RSLs and new sources of funding.
Against this backdrop, a number of Scottish RSLs have committed to their own sustainability targets, including adopting sustainable funding frameworks, agreeing to adopt one of the various housing sustainability charter marks, and publishing their performance annually.
Use of a recognised reporting standard makes sense – that should make it easier for third parties to compare apples with apples, particularly when making ESG lending decisions.
RSL boards and management teams are not without their challenges to seek. The rising cost of living will have an impact on us all, particularly in the social housing sector for both providers and tenants. Meeting ESG requirements might seem like a “nice to have”, but should be considered as a priority which will help them meet the other challenges on their to-do lists.
Derek Hogg is a partner at Harper Macleod