The role of green finance in enabling the development and renovation of social housing
What is the role of Environmental Social and Governance (ESG) financing in boosting housing affordability?Brussels, Belgium, 14 October 2022 | Social, Economy, The future of the EU & Housing
The energy transition and its financing have become engrained in the daily activities of social housing providers. Public grants and revolving funds are central to the viability of sustainability plans and key in increasing housing affordability. The housing 2030 report collects some of the best practices in the sector. While grants and funds are tried-and-tested means to finance the energy transition, other sources of financing such as carbon credits or green bonds have drawn the attention of private investors. These investment vehicles tend to come together under the umbrella of Environmental Social and Governance financing, better known by its acronym: ESG. Alex Fernandez, a PhD Research student at TU Delft, currently doing an internship at Housing Europe, is telling us more below.
ESG risks being one of the most (over)used acronyms of this decade. Hailed as “the” solution to climate change or dismissed as greenwashing, it is also becoming important to review its relevance for social housing. This has precisely been the focus of my research at Housing Europe, framed within the RE-DWELL project, funded by the European Commission. Last week, I was invited to the 83rd session of the UNECE Committee on Urban Development to discuss the role of green finance in enabling the development and renovation of social housing. Here are some of the points that I raised during the event.
In the last decade, ESG indicators have moved from the fringes of finance and come to occupy a central and much-debated role in investment decisions. However, there is wide heterogeneity in the activities and indicators recognised as “green” by both capital markets and public institutions. Particularly in Europe, defining the right ESG indicators has become central to many legislative debates. Only in the last four years, the EU has passed several acts to enhance transparency and orient capital toward ESG goals. The Sustainable Finance Plan includes the Climate Benchmarks Regulation (EU 2019/2089), Sustainable Finance Disclosure Regulation (EU 2019/2088) and the Taxonomy Regulation (EU 2020/852). While European and national frameworks define the common playing field, when it comes to the social housing sector, access to green finance remains limited to a number of providers. This article highlights three dimensions that may serve as points of departure to analyse green finance and social housing.
- Institutions and sizes: Due to the decline in public support, English housing associations are among those relying more heavily on private finance. Large social housing organisations have been releasing green bonds for a couple of years now. For example, L&Q, a large provider in the UK, was among the first to release a £300 million Sustainability-Linked Bond. While green bonds are a useful tool to raise finance, they are only effective for providers above a certain size due to administrative costs. A majority of social housing providers do not need finance at this large scale. Intermediaries such as public banks and aggregators play a relevant role in ensuring local housing associations are not excluded from the benefits of increased access to capital. Intermediaries release ESG bonds and lend-on to smaller housing associations improving access to finance. There is a need for tailored institutions at various levels to act as intermediaries connecting funding to projects.
- Guarantees: it is often organisations that already have easy access to finance that are leading on ESG. Stable cash flows, large assets in collateral and a track record of stability are what makes investment in social housing attractive. However, social housing providers come in all shapes and sizes across countries. It is particularly toward projects solving specific social and environmental in local neighbourhoods that ESG should be geared toward. Public institutions can help orient capital towards socially relevant projects by providing guarantees. For example, the Dutch Social Housing Guarantee Fund eases access to finance for social housing providers. Public institutions can help local projects by putting in place the right system of guarantees so social housing providers can also tap into capital markets.
- Standards: ESG usually builds on a set of indicators that are mostly quantitative. These indicators fail to fully capture the social business model at the core of social housing provision. One way the sector can tackle this issue is by releasing its own standards. For example, UK housing providers have released a shared Sustainability Reporting Standard for Social Housing agreed upon by several early adopters. These standards also include qualitative indicators related for example to the development of new projects. The sector is brimming with innovative projects. For example, the Municipality of Barcelona is developing a public-private housing operator that plans to create 4,500 social housing units. ESG standards should be designed to measure and reward with favourable conditions the positive social and environmental impact of these projects.
More broadly these issues feed into a larger debate about ESG, that of additionally.
Is ESG bringing extra funds into aligned projects or just used to refinance business-as-usual activities?
How much of ESG funding is reaching innovative projects in deprived areas and can indicators be adapted to increase that amount?
There are also other questions about the choice of vehicles ESG finance should pursue (bonds, loans, carbon credits). Providers have a key role in defining the measurement and reporting of their activities helping shape a growing market. In short, ESG is already playing a role in the sector.
All points to its relevance increasing and it may well become the “new normal” sooner rather than later. However, private ESG funding is far from being a silver bullet. State-provided grants, revolving funds, and guarantees will remain crucial in financing the energy transition and increasing housing affordability.