With the cost-of-living pressing pause on many green home plans, we look at green finance and its application in the social housing sector.


40% of the UK’s carbon footprint comes from building houses and social housing is responsible for 20% of that. The Social Housing Decarbonisation Fund (SHDF) was set up in 2020 to enhance the energy efficiency of socially rented homes and was part of a set of policies to help achieve the Government’s aim of net-zero carbon emissions by 2050.

The first wave of the SHDF was launched in 2021, committing £179 million in grant funding for upgrading works, with the second wave of £800m opening last year. Whilst this is a welcome contribution, research by the National Housing Federation shows that the full cost of decarbonising existing housing association homes will be at least an additional £36 billion on top of what the sector has already committed. Noting that EPC requirements continue to become more stringent as standards and regulatory requirements increase for all housing.

Meanwhile, housing associations have been in the news with new financial packages based on sustainability and ESG linked bonds. It would therefore appear to many onlookers outside the social housing and associated sectors that the green finance market (public and private) is truly enabling the upgrade of social housing, providing some relief to those suffering the cost-of-living crisis whilst at the same time helping to achieve net zero. Improving the energy efficiency of homes can also ease the cost-of-living pressures by reducing energy bills and lead to reduced fuel poverty, better health and an improvement to living standards.

Why is there a focus on green finance?

Recently there has been a shift in spending patterns and a greater link between investment and ethics for a new generation of investors. A number of different financial products have been created to meet this need, including those which offer financial incentives to borrowers that can demonstrate the meeting of various sustainability performance targets or those that embark on green or social projects.

What types of green finance are available?

The financial sector has creatively embraced the need for change and developed various approaches to managing climate change, biodiversity risk and adherence to net zero goals depending on the type of finance needed. Including but not limited to ESG linked bonds, private placements, ESG funds, green loans, social loans and sustainability linked loans. The main types of financing available in the market for retrofit projects are social loans, green loans and sustainability linked loans; products which must adhere to the Loan Market Association’s principles and guidance (created in conjunction with the APLMA and the LSTA).

Both social loans and green loans are ‘proceeds based’ loan products which mean that 100% of all of the loan proceeds are required to be used for eligible social or green project respectively (other core criteria will also need to be met i.e., criteria for project evaluation and selection, management of proceeds and reporting). Both of these types of loans offer a reduced margin in comparison to a normal or ‘brown’ loan. Examples of green projects include the retrofitting of a building to ensure it is more energy efficient or the development of a new energy efficient building and examples of social projects include affordable housing and affordable basic infrastructure.

In certain areas such as social housing there may be an overlap between a green loan and a social loan; there is an acknowledgement that a loan may follow a combination of the green loan principles and the social loan principles if the loan is also for the purpose of creating more energy efficient social housing or retrofitting current social housing stock to improve energy efficiency.

Sustainability linked loans are available to borrowers which have a sustainability strategy, provide certain key performance indictors (KPIs) and have annual sustainability performance targets (SPTs) against which to mark progress on the sustainability journey and reduce the margin accordingly. These are available to all borrowers which are looking to improve sustainability more generally and do not need to be a part of a particular sector, with no particular proceeds requirements i.e. the proceeds of the loan can be used for general corporate purposes.

There have been some creative solutions suggested such as the use of the model of financing used in the United States of America known as R-PACE mortgages. Residential PACE (or R-PACE) mortgages involve financing retrofitting of a property and the financing attached to the property itself rather than its owner which has the potential to transform collaborative funding approaches when considering multi-occupation dwellings. This could be considered in an effort to retrofit a larger percentage of the housing stock (including those parties who participated in the ‘Right to Buy’ scheme) but would need backing and adjustments to ensure this is viable in the United Kingdom.

Reporting standards

The Sustainability Reporting Standard for Social Housing was launched in November 2020 by the ESG Social Housing Working Group which includes 18 housing associations, banks and investors and other sector experts. The Standard is a voluntary reporting framework which enables housing providers to report on their ESG performance and is supported by Homes England and the Regulator of Social Housing. This reporting should make it easier for lenders to assess ESG performance and identify risk areas and so where housing providers are already part of the Social Housing Working Group they may wish to explore green finance.

Obstacles facing the sector

Those in, and those who have dealings with, the social housing sector have explained the various obstacles to upgrading these homes with green finance, namely:

1. Skilled labour and capacity shortage in the supply chain: Retrofitting with green technologies requires a range of specialised skills, including knowledge of energy efficient building materials, renewable energy systems and energy management systems. There is a lack of labour and materials for these works with such shortage causing delay and ultimately increased cost.

2. High cost of construction materials: Following Covid and the subsequent invasion of Ukraine, the cost of construction materials has risen sharply and although there is some indication that this is slowing down, they remain significantly higher than before the pandemic.

3. Lack of clarity: There is no confirmed guidance as to what “net-zero” actually means and how actions taken to achieve this are being assessed. Whilst there is a focus on EPC ratings, this surely cannot be the main indicator (with some suggesting it should not really be used as an indicator at all). This presents difficulties for investors in assessing the risks and returns of green financing opportunities, restricting capital flow into the sector.

4. Accessibility: Smaller housing associations are experiencing greater difficulty in accessing green finance, given the bureaucracy of the public offerings, such as the SHDF and the GLA’s Green Bond Programme and also the fragmented and growing complexity of the private green finance market.

5. Imperfect data – in respect of energy efficiency, GHG emissions, unknown and untested new technology, potential cost of retrofit and other unknown costs.

6. Increased scrutiny - from the public, politicians and the press.


Of course, more government funding would help with some of these issues. For example, (i) investing in training workforce to carry out green retrofitting works and (ii) providing further subsidies and guarantees for the period until the cost of construction materials return to a manageable level.

The development of a nationwide set of standards and guidelines for social housing retrofits could be advantageous to encourage green finance investment and the range of products available, especially for those smaller housing associations who cannot capitalise on bulk scale works.

Last but not least, there are those that see collaboration between housing associations, local authorities, investors and other stakeholders as making a long-term difference. A pilot collaborative programme of London’s local authorities ‘Retrofit London’ aims to achieve mass home retrofitting to achieve an average Energy Performance Certificate Level of B by 2030 (led by the London boroughs of Enfield and Waltham Forest). It requires a collaborative approach from all parts of government and the retrofit sector to ensure success which could be mirrored in the social housing sector to ensure efficiency, bulk purchasing advantages and speed of retrofit.” By working together to identify opportunities and share best practices, a supportive and enabling environment may very well help in unlocking the full potential of green finance.

Ultimately, the sector needs to make the most of all of the above opportunities to ensure that it can tackle the huge retrofit challenge it faces. Currently, green finance is offering financial incentives to borrowers who can demonstrate observance of ESG principles but in the long term green finance may become the main type of funding available.

Authors: Shazia Bashir, Imogen Benson, and Lowry Jenkins

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at June 2023. Specific advice should be sought for specific cases. For more information see our terms & conditions.

Date published

26 June 2023


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