Since the World Bank issued the first 'green' bond in 2008 (in response to a request from a group of Swedish pension funds who wanted to invest in projects which help combat climate change), there has been a fundamental shift in the bond market.
Investors now understand that the power they have to support the initiatives which their shareholders care about does not have to undermine returns. In fact, investing in an issuer with good sustainability practices will generally be a better investment. That first World Bank bond sparked a revolution in the bond market, one which housing providers can and should be taking advantage of.
In 2018 US$125,000,000 of new green, social and sustainability bonds were issued. Ten years after that first 'green' bond, the issuing of green, social and sustainability bonds is no longer the preserve of governments, agencies and supra-nationals. Companies and financial institutions who are either looking to raise money to invest in, or support their own, projects which have an environmental, social or governance (ESG) impact have recognised the value of issuing, and investing in, such bonds.
As the recent issue by the Loan Market Association of both 'green' loan principles and 'sustainable' loan principles shows the loan market is now catching up, lenders increasingly see the power and benefit of lending to borrowers who are looking to raise finance for projects which can demonstrate an ESG impact. Refinitiv reported global green and ESG loan volumes of nearly $60 million in 2018 and this market is only likely to grow.
Making sustainable finance available is good business and evidencing the ESG impact is increasingly important for businesses both for reputational reasons and to attract good quality shareholder and stakeholder investment.
So what is sustainable finance?
Very simply, it is finance for sustainable development. Sustainable development is defined by the United Nations (the UN) as "development that meets the needs of the present without compromising the ability of future generations to meet their own needs".
To achieve sustainable development, the UN recognises that it is crucial to harmonise three core elements: economic growth, social inclusion and environmental protection. Each of the 17 Sustainable Development Goals (SDGs) set out in the 2030 Agenda for Sustainable Development broadly fits within one of these categories. The SDGs include:
- the eradication of poverty and hunger;
- access to affordable clean energy;
- investment in infrastructure and in cities which provide opportunities for all, with access to basic services, energy, housing, transportation and more; and
- action on climate change to action to protect our environment.
Why has sustainable finance taken off?
Growing public awareness of the challenges which the SDG's aim to address and an increased commitment from government and business in the UK to meet these challenges coupled with the realisation that individuals (through technology and shareholder activism), as well as businesses and government, can make a difference, has resulted in an increase in investment in projects which have an ESG impact.
The desire (and ability) of individuals to invest in projects which have a positive environmental and/or social impact has driven the bond and loan markets to develop products which support projects that meet these aspirations. Add to this:
- the recent changes to the UK Corporate Governance Code putting the onus on directors to promote the long term sustainable success of their companies and;
- the forthcoming changes to pension trustees fiduciary duties which will require pension scheme trustees to consider ESG factors when making investment decisions
and the result is that housing providers are well placed to take advantage of both increased funding availability and the incentives being offered by institutions who want to deploy the funds they have available in a way which meets their ESG aims and those of their stakeholders.
Many lenders have committed to making loans available to borrowers who are prepared to agree to meet specific, measurable environmental targets. In return, borrowers will receive margin discounts and other benefits. Those same institutions, as well as alternative lenders (such as pension funds) are also looking to deploy funding through the capital markets. So now is the time to consider whether adhering to the Loan Market Association's 'green' or 'sustainable' loan principles or the International Capital Market Association's green bond principles, social bond principles or sustainable bond guidelines could give you an edge when seeking to raise funding. All of them are designed to give certainty to lenders and investors that funds will be used for projects that will have an impact on ESG issues,
Why is sustainable finance an opportunity for housing providers?
Given that many of the principles articulated by the SDG's are already at the heart of the activities of housing providers there has never been a better time to seek long or short term finance for projects which will have an ESG impact. Given how uniquely placed housing providers are to take advantage of the availability of such bonds and the potential pricing benefit, this is an avenue that housing providers should be exploring with their treasury teams.
When Danone issued its first €300 million social bond in March 2018, the bond (which was the first to follow ICMA's Social bond principles) was oversubscribed 2.3 times with demand for the bond exceeding €700 million. Likewise MorHomes recent £250 million bond issues, which also follows ICMA's social bond principles, and carries a 3.4% coupon which is paid half yearly, was almost twice oversubscribed.
We are seeing more and more "green" financing products offered (not just in the capital markets) as the traditional funders to the social housing finance sector seek to capitalise on the desire of investors to invest in safe, sustainable assets with a social impact.
It is easy to see that, market participants are responding to the demands of their stakeholders. They want to be able to demonstrate their commitment to supporting sustainable businesses and projects which have an ESG impact. The measures being implemented by government which, despite not having the force of law, are designed to incentivise businesses to focus on these issues. So you have a perfect storm of opportunities which housing providers should be considering taking advantage of. What is the sector waiting for?