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The UK Green Building Council recently reported that the UK’s buildings are responsible for approximately 30% of the country’s total greenhouse emissions. If the UK is to remain on track to achieve its net zero carbon emissions target by 2050, clearly urgent work is needed to increase the energy efficiency of the UK’s property stock.
Since the introduction of the UK’s net zero target, green and sustainable finance has steadily moved up the list of priorities for registered providers (local authority landlords and private providers such as for-profit organisations and non-for-profit housing associations).
Retrofitting and decarbonising property is one of the main challenges to arise from the net zero target and is becoming an increased area of focus for government and policymakers. This is evidenced in emerging government policy including the recent publication of the government’s Ten Point Plan for a Green Industrial Revolution, the £2 billion Government Green Homes Grant scheme and the Minimum Energy Efficiency Standards consultation.
However, there are several barriers to achieving energy efficiency in UK housing, particularly in the social rented sector. A May 2020 report by the Green Finance Institute Coalition of Energy Efficiency of Buildings (CEEB) identified several barriers including:
One solution proposed by the report is an industry-recognised certification for financial problem-solving that supports the retrofit of residential buildings. This in turn could potentially enhance the confidence of lenders and borrowers to invest. Other possible solutions include: a certification scheme for green buildings and retrofit projects; new financial products for funding a retrofit; and adjusting the definition of ‘affordable rent’ to include modelled energy costs. This may incentivise landlords to provide properties where rent and energy bills are both affordable for tenants.
It is estimated that the cost of retrofitting all social homes in the UK to zero carbon would be in the region of £100bn. The challenge for registered providers therefore is how this potentially huge cost is going to be met.
In England, the Government has committed to making funding available and, following the launch of the Social Housing Decarbonisation Fund (SHDF) Demonstrator in October 2020, £62 million in funding has been awarded to 17 local authorities for 19 projects.
The SHDF demonstrator project is an initial investment to learn lessons and catalyse innovation in retrofitting for the SHDF, for which the manifesto committed £3.8 billion of new funding. The project will demonstrate innovative approaches to retrofitting social housing at scale to bring the homes up to Energy Performance Certificate (EPC) band C or higher.
A further £60 million has been committed by the Chancellor to this fund, which is due to launch in the 2021 to 2022 financial year – further announcements on this are expected shortly.
Earlier this year, Lloyds Bank agreed its first sustainability-linked loan within the social housing sector, with an interest rate reduction associated with improving the energy efficiency and decarbonisation of its existing housing stock.
In addition, several landlords have issued ‘sustainability bonds’ and PA Housing has recently issued a £400m sustainability bond, following Aster and Clarion. Sustainability bonds require the finance to be used exclusively for green or social projects. These deals pave the way for more bond issues to follow across the social housing sector.
Green and sustainable finance continues to be an increasing priority for funders. Registered providers already prioritising environmental and sustainability goals are therefore likely to benefit from access to a broader investor base.
In November 2020, the National Housing Federation issued the Code of Governance 2020 (the Code) for social housing providers and its members. In the same month, The Sustainability Reporting Standard for Social Housing (the Sustainability Standard) was published by The Good Economy.
The Code embeds the concept of sustainability and requires signatories to consider value for money, financial sustainability, carbon neutrality, environmental sustainability, and social sustainability in strategic planning. This recognises the increasing importance placed on environmental, social and governance factors across the sector.
The Sustainability Standard is designed to create a consistent, comparable, and transparent approach to assessing the ESG performance of registered providers. Although voluntary, there has been significant uptake across the sector.
The Sustainability Standard is key to enabling lenders and investors to assess the ESG performance of registered providers, identify ESG risks and pursue opportunities to create positive outcomes.
The recent creation of the Social and Affordable Housing Sustainability Reporting Standards Board also aims to ensure that the Sustainability Standards continue to be owned and managed by practitioners from the sector in the interests of all stakeholders.
Ready availability of private finance is critically important to meeting net zero targets across the social housing sector, including decarbonising and adapting the social housing stock to drive energy efficiency.
As we think about the future of society and the economy, the social housing sector will need to consider how to balance its work to achieve net zero targets with the wider challenges imposed by the housing crisis. As many registered providers already go beyond their core business of providing affordable housing by delivering other services with social benefit, such as supporting tenants in relation to employment, training, homelessness and social security, the sector is in a unique position to lead the way in demonstrating how to overcome some of the challenges in the retrofit finance market.
This publication is intended for general guidance and represents our understanding of the relevant law and practice as at June 2021. Specific advice should be sought for specific cases. For more information see our terms & conditions.
01 June 2021