ESG – Opportunities and Challenges for Boards

By: Ellen Damlica @EllenDamlica

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“ESG” stands for environmental, social and governance;

Environmental factors” relate to the quality and functioning of the natural environment and natural systems and in the context of investment it includes the environmental footprint of an organisation (such as energy or water consumption), environmental governance (such as management systems) and environmental product stewardship;

Social factors” relate to rights, well-being and interests of people and communities and in the context of investing include worker rights, safety, diversity, education, labour relations, supply chain standards, community relations and human rights;

Governance factors” relate to the management of organisations and in the context of investing include policies or practices by which an organisation is directed or controlled (transparency on board remuneration, independence of boards and shareholder rights);

“Green bonds” are bonds used to enable capital-raising and investment for new and existing projects with environmental benefits, with the process guidelines for issuance aligned with the Green Bond Principles;

Green loans” are any loan instrument made available exclusively to finance or re-finance, in whole or in part, new and/or existing eligible “green” projects aligned in the market with the Green Loan Principles;

Sustainability linked bonds” are bonds where the proceeds will be exclusively applied to finance or re-finance a combination of both “green” and “social” projects, with the process guidelines for issuance aligned in the Sustainability-Linked Bond Principles;

 “Sustainability linked loans or SLL” are any type of loan instrument which incentivises the borrower’s achievement of ambitious, predetermined sustainability performance objectives aligned in the market with the Sustainability Linked Loan Principles;

“Net zero emissions” result in all man-​made greenhouse gas emissions being removed from the atmosphere through reduction measures.

Environmental, social and governance (“ESG”) matters have steadily moved up the list of priorities for registered providers of social housing (“RPs”) and other housing providers following the introduction of the UK’s legally binding target to produce zero net greenhouse gas emissions by 2050 (the “2050 Target”).

This is accompanied by the need to source additional funding to try and help solve the current housing crisis by providing, maintaining and improving high quality affordable housing.

One of the main practical challenges to arise from the 2050 Target includes the need to tackle energy demand and carbon emissions in domestic properties, which is likely to require consideration of retro-fitting and in some cases demolition and rebuild. Housing providers will need to ensure that they have accurate data on the energy performance levels of stock and how required energy works can be included in planned maintenance and repair programmes, or how additional works could be funded.

The source of funding is a wider, more complex issue that requires consideration of the wider investor landscape, including any existing ESG requirements and considerations that impact investment decisions. By its very nature social housing is delivering a desirable outcome in terms of social impact. The key to unlocking the potential of increased access to alternative means of finance to tackle the housing crisis requires a wider understanding of investor obligations and how these can be reflected and reported against by housing providers.

What existing legal and regulatory responsibilities do RP Boards have in respect of ESG?

The duty to promote the “success” of the company

Section 172(1) of the Companies Act 2006 requires company directors to act in good faith and in a way most likely to promote the success of the company for the benefit of its members as a whole, having regard to a non-exhaustive list of matters including the impact of the company’s operations on the community and the environment.

In respect of financial years beginning on or after 1 January 2019, “large” companies are required to produce a strategic report describing how the directors have had regard to the matters set out in section 172. A “large” company is defined as one which meets at least two of the following criteria:

• annual turnover of £36 million or more;
• balance sheet total of more than £18 million; or
• more than 250 employees.

In addition, companies that are excluded from being considered “medium sized” must also produce a strategic report. These companies include:

• public companies; or
• those that carry on regulated activities under Part 4 of the Financial Services and Markets Act 2000 (“FSMA”); or
• scheme funders of a Master Trust scheme; or
• those that carry on insurance or market activity; or
• those part of an “ineligible group” (where any of its group members is a traded company or a corporate body that has shares traded on a regulated market or carries on regulated activity under FSMA).

Therefore, the section 172 obligation and reporting requirements will apply to RPs (or members of their groups) that are registered companies and meet the definition of a “large” company, and will also apply to groups that have companies excluded from being “medium sized,” which will include public companies or those with bond vehicles within their groups. However, it is arguable that all boards, including those of community benefit societies (the most common legal structure for RPs) should, in ensuring they act in the best interests of the organisation, have due regard to the long term success of their organisation and the factors set out in section 172.

In determining what will promote the success of the company there will be a range of considerations, including ESG factors. The measure of success is often viewed as the financial success or the long-term increase in the value of the organisation, to which ESG factors will most certainly be relevant, particularly in light of the 2050 Target and the increased availability of sustainability linked finance (see further below).

SECR Reporting

Streamlined Energy and Carbon Reporting (“SECR”) requirements also apply to quoted companies and “large” unquoted companies and LLPs (applying the same definition as set out above), requiring energy and carbon information to be included within their directors’ report for any financial years beginning on or after 1 April 2019. Whilst bond vehicles may be caught as quoted companies, the reporting requirements only catch companies that have consumed more than 40,000 kilowatt-hours of energy in the UK. We anticipate that only a small number of RPs will be caught by the SECR reporting requirements.

The potential for increased requirements in the future?

Under the UK Government’s Green Finance Strategy 2019, aimed at transforming the UK’s financial system for a greener future, the Government set out its ambitious expectation for all listed companies and large asset owners to make climate-related financial information disclosures  by 2022 in line with the recommendations of the Task Force on Climate-related Financial Disclosures (“TCFD”), as outlined in its final 2017 report. While these disclosure requirements do not currently apply to RPs, there are questions as to whether they could fall within the category of a “large asset owner” should these definitions be further expanded in the future.  

The Financial Conduct Authority (“FCA”) also recently published proposals in relation to a new disclosure rule that would require all commercial companies with a UK premium listing to make disclosures after 1 January 2021 in line with those recommended by the TCFD or explain the reasons for non-compliance. While these requirements currently only affect a limited pool of organisations, the FCA has indicated that it will consider extending the reach of these obligations in the future. As a result, there are proposals that these requirements will be expanded to a wider pool of organisations in the future, which may include RPs.   

Regulatory considerations

In order to demonstrate that they are complying with their requirements under the Value for Money Standard, RP Boards should ensure they are considering the potential gains which could be achieved through early consideration of sustainability issues in particular, and the potential opportunities arising from the increasing number of green and sustainability-linked finance deals in the sector.

The new National Housing Federation Code of Governance (“NHF Code”) embeds the concept of sustainability in Principle 2 and also includes a requirement for Boards of all organisations signed up to the NHF Code to give specific consideration to value for money, financial sustainability, carbon neutrality, environmental sustainability, and social sustainability in setting financially sustainable plans. The guidance accompanying the NHF Code notes that the “new requirements in the code respond to the increasing value placed upon environmental, social and corporate governance both within the housing sector and beyond it” despite the lack of specific reporting and disclosure requirements.

ESG focus for investors

ESG is an area of growing importance to investors and funders due to the increased reporting and disclosure requirements that they are bound by. As a result, investors are looking at investee organisations as one of the main methods of demonstrating their compliance with the criteria. This has resulted in a number of ESG obligations indirectly trickling down to organisations that are not strictly bound by the reporting and disclosure requirements if they hope to attract different funding streams. In considering the obligations of investors and other stakeholders, RPs will better be able to demonstrate how investors can help meet their own obligations, making them a more attractive investment option.

Unhelpfully, there is no overarching ESG framework. Instead we have a complex web of policies, consultations, statements, strategies, corporate governance codes and other mechanisms, voluntary initiatives and principles at a global, EU and national level. It can therefore be difficult to establish the applicable reporting standards and disclosure requirements affecting investors and other stakeholders.

At a global level, the Principles for Responsible Investment (“PRI”) is an international network of investors supported by the United Nations. Signatories to the PRI include a number of financial institutions who participate by agreeing to and making voluntary disclosures against the PRI’s six principles committed to promoting environmental and social responsibility. The widespread growth of PRI and increasing integration of ESG factors across financial institutions has led to changes in wider policies and frameworks to support this movement.

In the UK, the revised UK Stewardship Code 2020 (“the Stewardship Code”) produced by the Financial Reporting Council (“FRC”) took effect from 1 January 2020 and clearly demonstrates that ESG factors are becoming more prevalent to investors when making investment and stewardship decisions. Organisations need to apply to become signatories to the Stewardship Code, which consists of 12 Principles that apply to asset managers (investment managers) and asset owners (pension schemes, insurers, foundations, endowments and sovereign wealth funds), and 6 Principles for service providers (investment consultants, proxy advisors, and data and research providers). Each Principle is supported by information reporting expectations to be made publicly available in order to become a signatory to the Stewardship Code. The Stewardship Code emphasises that “environmental, particularly climate change, and social factors, in addition to governance, have become material issues for investors to consider when making investment decisions and undertaking stewardship.” There are also two specific Principles of the Stewardship Code which apply to asset owners and asset managers which encourage consideration of sustainability and environmental, social and governance issues, and climate change, in order to demonstrate effective stewardship.

In addition, as above, the statutory duty under section 172 of the Companies Act 2006 and associated reporting requirements will impact investors. Most investors will also be caught by the disclosure requirements recommended by the TCFD and many will be bound by the FCA’s new disclosure rules due to come in force in the New Year. Some investor companies and other stakeholders may also be required to consider their contribution to wider society under the UK Corporate Governance Code.

Green and Sustainability-Linked Finance Deals

Unsurprisingly, the increased focus on ESG considerations by investors have resulted in a sharp upsurge in the number of green or sustainability-linked finance deals in the housing sector. There has been an increased focus on “impact investing” aimed at delivering a measurable social or environmental impact in addition to a financial return.

There is particular interest from overseas investors in the social housing sector, including several sustainability-linked facilities from Sumitomo Mitsui Banking Corporation and MUFG. A number of these deals link interest rates to “social impact indicators” and are dependent on the RPs delivering their stated targets in relation to initiatives and investments linked to training and support programmes, youth mentoring schemes and employment and apprenticeship programmes. There are other sustainability-linked deals in the sector which include a margin discount linked to tenancy sustainment targets and to childcare metrics. It is clear that the opportunities are not linked solely to environmental objectives, with several that relate to social factors, including mentoring schemes and employment criteria.

We have also seen sustainable bond issues – in January and November, Clarion raised £350m and £300m in sustainable bond issues, with Clarion being the first UK RP to be accredited with the pan-European Certified Sustainable Housing Label in November 2019.

A sector wide standard

The onus is currently on RPs themselves to understand and consider ESG matters, as there is not currently a regime requiring them to report against criteria or make specific disclosures. However, in order to take advantage of the opportunities in the market, they need to be able to clearly demonstrate that they are capable of fulfilling the financial and impact objectives of potential investors. To this end, on 6 May 2020, a number of RPs and sector stakeholders produced a white paper (the “White Paper”) to create a standard approach to ESG reporting across the sector. The White Paper resulted from discussions with investors and other stakeholders about the increasingly fundamental role that ESG plays in the credit process underpinning future investment decisions. It explored the market context and social need for affordable housing, linking to the UN’s sustainable development goals, and considered the role of private investment in addressing the issues around provision of social housing while detailing the proposed sector standard approach to ESG reporting.

On 10 November 2020, the ESG Social Housing Working Group published its final report and the Sustainability Reporting Standard for Social Housing (the “Standard”). The Standard is made up of 48 criteria centred on 12 core themes:

• Board and trustees;
• Structure and governance;
• Resident support;
• Resident voice;
• Placemaking;
• Affordability and security;
• Building safety and quality;
• Staff well-being;
• Resource management;
• Supply chain management;
• Climate change; and
• Ecology.

The Standard will be voluntary; however, 27 lenders and investors and 34 RPs have signed up as early adopters. It is hoped that the Standard will provide a consistent and transparent approach to ESG reporting for RPs and demonstrate to investors how investment into the sector can meet ESG requirements. A new Social and Affordable Housing Sustainability Reporting Standards Board is due to be established in early 2021 and will oversee the Standard.

Other RPs have already taken the initiative on ESG reporting – Optivo, for example, published its summary report in July 2020 to assist investors in forming a view on the organisation and its activities by measuring itself against the UN’s sustainable development goals.


ESG has become mainstream in the past few years, and it is no longer something that RPs can afford not to prioritise. The Regulator of Social Housing has made it clear that RPs should be actively considering the 2050 Target and what this means for each organisation will differ.

It is also seems clear that Government funding to assist in meeting the 2050 Target will be limited, so opportunities to attract alternative sources of funding will need to be embraced.

While most RPs will not currently be bound by the strict reporting and disclosure requirements that affect large companies, this position is subject to change in the future and regulatory obligations are slowly starting to shift towards consideration of ESG factors, most notably in the recent NHF Code 2020 and the formulation of a sector-wide Standard on ESG reporting.

Given the natural fit of the activities being carried out by RPs with ESG principles, RPs should seek to embrace the opportunities being offered through ESG reporting, particularly in relation to attracting further private investment into the sector. Rather than seeing this as just another reporting obligation, RPs should take this opportunity to “blow their own trumpet” and highlight the work they are doing which furthers ESG objectives – if they don’t, who will?

Author bio

Ellen Damlica is an Associate in the Housing Corporate and Governance Team at Penningtons Manches Cooper LLP and primarily advises housing associations on a wide range of corporate, governance and company secretarial matters within both the housing and wider third sector.

Her twitter handle is @EllenDamlica and linkedin is Ellen Damlica.


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