Two recent articles in The Times and The Sunday Times highlighted the attractiveness of the affordable housing sector to investors keen to promote their ESG credentials.
During the pandemic, ESG has gone from being a niche term used mainly by private equity funds and their investors to being a mainstream term used across a range of sectors and industries. It is now rivalling “sustainability” as the term of choice for businesses seeking to minimise their impact on the environment, have a positive social impact and demonstrate that they are responsibly managed. The COP26 climate change conference taking place in Glasgow in November 2021, provides a platform for UK businesses to demonstrate their ESG credentials.
On the face of it, social housing is an obvious choice for ESG investors. After all, the “S” in ESG is “social”. But is that social purpose the real reason to invest in it? As the Sunday Times article points out, social housing is attractive as an investment because the rent is relatively secure and landlords who provide specialist supported housing are permitted by the government to charge higher rents. While there is nothing wrong with investing in sectors which can deliver good returns, does the growing interest in ESG provide no more than a convenient PR tool for investors? In reality, there may be little difference between funds that invest in social housing and funds that invest in other parts of the living sector, such as ‘built to rent’, in that they both have a common goal of maximising returns for their investors, but the former can claim to have better ESG credentials than the latter.
The environment is also an increasingly important factor for investors in the living sector, as the government seeks to mitigate the impact of buildings on climate change and ensure that the UK is made more resilient to the inevitable impacts of climate change. According to BEIS, in 2020 the living sector accounted for 20.8% of the UK’s CO2 emissions (some 67.7 MtCO2). That represents a 13.5% reduction since 1990, which is no mean achievement given that the number of households has increased in that period, but other sectors have delivered much greater reductions over the same period - for example, the public sector has delivered a 42.2% reduction and the power generation sector an impressive 75.3%.
There has been no shortage of regulation to try to improve the environmental performance of the living sector, from Energy Performance Certificates to Part L of the building regulations. In the near future, the sector is also going to have to deal with the government’s proposed ban on the installation of gas-fired and oil-fired boilers from 2025. Under proposals contained in the Environment Bill - which is expected to become law later this autumn - developers will also be faced with a condition in every planning permission requiring them to deliver a minimum 10% increase in the biodiversity value of development sites. In many cases, that “biodiversity net gain” will need to be delivered off-site, which in itself creates an investment opportunity for acquiring sites that can be used to generate biodiversity “credits” for sale to developers needing to comply with their biodiversity net gain planning conditions. It seems likely that such investments will also be marketed to investors on the basis of their ESG credentials.
The appropriation of land and resources for environmental purposes is also a factor in the concept of net zero carbon, the achievement of which by the UK economy before 2050 is now enshrined in the Climate Change Act 2008, following an amendment to it in 2019. A net zero carbon economy does not actually emit zero carbon, but offsets what it does emit through measures such as carbon offsetting, which may involve activities such as the acquisition of land outside the UK for afforestation. This so-called “green grabbing” poses a whole new set of challenges for investors seeking ESG-compliant investments.
While the EU has adopted the Sustainable Finance Disclosure Regulation (which imposes duties on investors and financial advisers to make disclosures about their approach to sustainable investment) and the related Taxonomy Regulation (which establishes the criteria for determining whether an economic activity qualifies as environmentally sustainable for the purposes of establishing the degree to which an investment is environmentally sustainable), the UK government has proposed a different approach. In November 2020, HM Treasury published A Roadmap towards mandatory climate-related disclosures, which proposed mandating climate-related disclosures across the UK economy aligned with the recommendations of the Taskforce on Climate-related Financial Disclosures (TCFD). As their name suggests, the TCFD disclosures are focused on climate risks, rather than on ESG risks generally, so their scope is much narrower than that of the disclosures required by the EU Sustainable Finance Disclosure Regulation.
Organisations operating in the living sector should also be aware of making claims about their environmental credentials following the Competition & Markets Authority’s recent publication of its guidance on making environmental claims on goods and services. Housebuilders marketing “eco-homes” or “zero carbon” homes should pay close attention to the guidance’s principles to avoid accusations of mis-selling.
ESG investing in the living sector is here to stay. Interest in ESG investing is likely to increase as the UK moves towards its net zero carbon target in 2050 and the government’s Roadmap towards mandatory climate-related disclosures is implemented. While the delivery of good investment returns will undoubtedly remain a primary aim for investors in the sector, new and emerging regulation will require them to be more transparent about their ESG policies for selecting investments and the ESG credentials of individual investments.
This article appears in our Investing in Living report. To access the full report, please click on the link to the right of this page.