[ORIGINALLY PUBLISHED IN SOCIAL HOUSING]
More than a year on from the launch of the Sustainability Reporting Standard for Social Housing, how is it working from an investor perspective? Craig MacDonald, global head of fixed income at Abrdn, and a Sustainability for Housing board member, reflects
We all know that climate and other sustainability issues are increasingly important to the public, companies and investors. But what does this mean in practice when we are looking to invest in the UK social housing sector?
Just as importantly, how does the Sustainability Reporting Standard (SRS) – the sector’s own environmental, social and governance (ESG) reporting standard – fit into this?
I work at Abrdn, and we invest more than £3.5bn in UK social housing on behalf of a range of clients.
The starting point of any investment is to understand the risks involved, how management approaches those risks, and to ask if clients are being sufficiently rewarded relative to those risks.
In addition to the traditional risks associated with the housing sector (debt; rental affordability and local housing demand; large capital programmes), we believe that ESG and sustainability-related risks are increasingly important.
When looking to understand what ESG risk means in ‘real terms’ for a sector like social housing, one only has to think of fuel poverty, the need for greater energy efficiency, or the negative impact of a lack of engagement between a board, senior management and tenants.
For investors such as Abrdn, understanding these ESG-related risks is therefore important, whether it be greenhouse gas emissions, energy efficiency of the properties, or your impact on communities.
While we still invest in associations that do not use the SRS, we believe it has improved transparency and helps us better understand these types of risks. It also allows us to clearly compare different social landlords and gives us insights into whether sustainability issues are helping to inform management and board strategy as opposed to primarily being a box-ticking exercise.
The need for increased transparency and comparability is only going to increase in importance as investors, regulators and other stakeholders are putting ESG metrics and disclosures under increasing scrutiny.
In the UK, ESG reporting is advanced and many issuers within the UK housing sector are already producing sustainability reports and tracking ESG metrics. The issue is that these metrics can be inconsistent, hard to compare and not always as relevant as they should be.
The SRS creates a common reporting structure and facilitates early adoption of ESG reporting on a sector-wide level – something we haven’t tended to see in many other sectors, particularly in such a collaborative way.
While we and other investors will be looking at the reports and metrics produced by individual organisations, there is a collective benefit to the sector in being an early mover on this agenda, in both raising its profile and enhancing its reputation across the investor community.
Understanding and properly calibrating sustainability risks is also increasingly important from a client perspective.
The volume of money being directed to dedicated sustainability or ESG funds is growing exponentially, with a reported 40 per cent growth in money invested in related funds in 2021 reaching circa $10tn globally.
At Abrdn, we are finding that an increasing number of our clients are specifically setting ESG or sustainability-style mandates, or investment restrictions, so we offer dedicated investment solutions such as climate transition bond funds, which provide finance to companies or bodies that are helping to combat climate change.
The ability to clearly assess sustainability risks relating to a housing association’s debt will widen the long-term sources of capital and financing opportunities for those entities that are providing an essential role in society.
The availability of this larger pool of capital will ultimately reduce the cost of debt funding for the sector.
Lastly, as a responsible, long-term investor, stewardship and ESG are fundamental components of our company-wide investment philosophy and process. This means demonstrating how our investments are performing in an ESG context. And like other investors, we are now seeing this reinforced through our own reporting requirements.
While we already report on our progress against climate-related commitments in line with the Task Force on Climate-related Financial Disclosures (TCFD), the UK will become the first G20 country to enshrine the mandate into law from April this year, meaning more than 1,300 of the largest UK-registered companies and financial institutions will have to disclose climate-related financial information on a mandatory basis. While not directly impacting sectors like social housing right now, it’s a sign of what is coming down the line.
This is why I believe that the SRS will bring significant benefits to housing associations and why I feel privileged to be part of the board of Sustainability for Housing.