The future of Sustainability-Linked Loans
How sustainable finance can evolve to meet housing provider needs
INNOVATION & IMPROVEMENT
Image: Istock
Imran Mubeen
Director of Treasury, Bromford Housing Group
Chris Evans
Director, Newbridge Advisors
Issue 71 | April 2024
The use of Sustainability-Linked Loans (SLLs) in the affordable housing sector has grown substantially since its emergence around 2017. In simple terms, the housing association borrower selects a sustainability-themed key performance indicator (KPI) and agrees annual targets with the lender to improve performance over time. While commercial structures can vary, generally the borrower pays a lower margin or interest rate each year if it successfully meets the agreed target. So, what are the benefits of SLLs?
Borrower benefits
SLLs are financing tools that enable housing associations to demonstrate their commitment to sustainability. Also, with regular reporting internally at management and board level and externally to the lender, the use of SLLs promotes greater visibility, transparency and accountability of the borrower’s performance over time.
SLLs have already demonstrated how they can bring together a community of colleagues from different directorates across finance, strategy, risk, asset management and customer experience to create a shared vision for how the housing association can positively impact its people and the planet. This approach also ensures there is nowhere to hide if the housing provider fails to deliver on its sustainability commitments.
The loan savings for hitting the agreed KPIs are generally in the region of 5bps (0.05%), so while it won’t meaningfully reduce a borrower’s interest bill, it can be reinvested into underfunded but much-needed community projects to drive social value.
Addressing challenges
However, the SLL approach is experiencing both fatigue and criticism from some quarters in the housing sector. Regulatory demand for “stretching” sustainability targets, the requirement for deep analysis and detailed reporting on nascent data streams, and the availability and cost of external verification are some of the challenges that threaten the survival of SLLs as a tool to deliver improved sustainability outcomes.
On 15 February 2024, a roundtable between housing associations and three leading funders took place to discuss the SLL product and how it can continue to serve and drive improvements to those in the social housing sector.
The discussion adopted Chatham House rules to enable the participants to speak freely and it yielded a fascinating insight into the challenges often faced by housing associations and how lenders are trying to find ways to support the sector, navigating the ever-increasing regulatory focus.
Steering group
- Imran Mubeen (Bromford Housing Group)
- Matt Cooper (Places for People)
- Tariq Kazi (Southern Housing)
- Corinna Bishopp (RHP)
- Isabelle Kirk (Stonewater)
- Helen Hunter (Addleshaw Goddard)
- Chris Evans (Newbridge)
- Luke Cross (Social)
“Housing associations are working through one of the sector’s most challenging eras.”
Roundtable results
The collective view was that the SLL product required re-imaging if it was to survive and continue serving the sustainability aspirations of housing associations. With stubborn inflation, an elevated interest rate economy, and a renewed focus on investment in existing homes, housing associations are working through one of the sector’s most challenging eras – which has also given rise to a general weakening in credit and regulatory ratings.
Merger activity has also driven corporate priorities at a number of larger housing associations in recent times. Against this backdrop, where sustainability sits in the pecking order, both economically and operationally, is under scrutiny in the board room. As such, finding ways for SLLs to better demonstrate why they represent such a valuable investment will add support to their purpose.
Such enhancements could include:
01
Demonstrating SLLs are a fundamental prerequisite for new funding. Lenders should be aware of the implications of continuing to decouple sustainability from lending facilities, while also pursuing greater sustainability performance, reporting and disclosure from housing associations. If the housing association adopts the sector’s Sustainability Reporting Standard, can there be an acceptable reason to borrow without including a link to sustainability?
02
Demonstrating the SLL product is of premium value to the lender in their aspirations to drive a more sustainable future. This may include the lender delivering greater discounts, in part to cover the additional resource burden and budget faced by the borrower to cover enhanced data quality, reporting and external audit.
03
Demonstrating that housing associations and lenders can work in partnership with a shared drive for improving sustainability outcomes through two-way linkage. This might involve lenders attaching their own targets to a loan alongside the housing association’s, with a similar margin ratchet for over or underperformance. Housing associations can then demonstrate to their board members, colleagues and customers that their own drive for sustainability data and improved performance is genuinely matched by that of their lender.
04
Working with external consultants and audit firms to drive a third-party verification process that delivers a value-for-money and value-adding service. Lenders can support housing associations in their discussions with external, third-party verifiers to ensure the service provides commentary on the accuracy and reliability of the data. This can determine appropriate baselines and set out progress, rather than merely being a funder tick-box exercise.
Ensuring sustainable finance remains sustainable
Sustainable finance will continue to evolve over the coming years and the SLL product has an important role to play in driving greater visibility, transparency and accountability around ESG performance. And yet, the use of SLLs will continue to be under fierce examination in the social housing sector as the benefits of these linked loan arrangements are assessed against the investment required by housing associations. For the SLL product and its benefits to have longevity, funders and associations must work through the important challenges of value and verification, and make a commitment for ESG performance to be a genuine two way street. The working group established through this roundtable will continue to work towards developing a funder and association-led framework to ensure sustainable finance remains sustainable.
“In our experience at Bromford in our recent SLL deals, it is possible to agree an approach that works for lender and borrower.”
