Amid the growing buzz concerning environmental, social and corporate governance (ESG), Maria Goroh of Centrus takes stock of the investor perspective, specific points that influence decision-making and the impact on performance in the market.
Housing associations should monitor ESG KPIs, as these will affect their funding in the long run (picture: Getty)
For the first time this year, in all capital-market-related roadshows, in both public and private markets, Centrus has been including slides on ESG, to highlight borrower-specific key performance indicators (KPIs), as more investors are using ESG criteria in selecting the credits they like.
ESG screening tools have been available to investors in the listed equities markets for several years, but the rise of this trend in the corporate debt market is more recent.
Companies with listed equities have more stringent reporting requirements and are incentivised to provide KPIs on ESG scoring to attract more capital sources to increase valuation of the equities. For instance, during the market shock caused by COVID-19, ESG equity funds recovered faster than wider market indices.
The benefits of ESG scoring may have been less apparent in the debt markets, which vastly outsize the equity markets, but regulators such as the Bank of England have been pushing investors to implement ESG scoring criteria. This in turn is leading investors to demand that borrowers provide ESG KPIs.
There may have been initial resistance to monitoring and providing ESG-related indicators, as there hadn’t been any apparent cost of funds benefits in the bond and private placement market, but this trend is starting to change.
Last year, a working group including the Good Economy, Peabody, Clarion, M&G, Insight Investment and Centrus launched an initiative that resulted in the creation of a proposed sector-wide ESG framework. Since then, more investors and housing associations have signed up as early adopters of the framework, and we are rolling it out to more clients and institutions in September. The aim is to create sector-wide reporting criteria accepted by all major investors.
At the moment, large investors with ESG screening policies typically send ESG-related questionnaires to the borrowers. These questionnaires differ from investor to investor and are an inefficient way for borrowers to communicate their KPIs. Standardisation of this process should result in further efficiencies and transparencies.
Apart from KPIs related to diversity of management, board and workforce, as well as positive social externalities, the Energy Performance Certificate (EPC) ratings of social housing stock have recently been in the spotlight. Poor EPC ratings not only potentially result in poor scorings for the “E” in ESG, they also have sizeable implications for financial planning. EPC monitoring and improvement planning can play an important part in a housing association’s stock-rationalisation strategy.
We see a strong ESG investment trend, as investors continue to deploy capital and seek ways of differentiating their investments. This is especially true of European and UK investors, and the expectation is that North American investors will follow shortly. We believe that housing associations should monitor ESG KPIs as these will affect their funding in the long run.
We are currently working on attracting more investors to become early adopters of the ESG framework. L&G and Pension Insurance Corporation were initial founders, sponsors and early adopters, and we expect more mainstream investors and banks to join in the coming months, now that the holiday season is over.
“There are many reasons why investors are keen to join the framework”
There are many reasons why investors are keen to join the framework: it helps to standardise and streamline their analysis and to demonstrate the ESG aspects of their investments to stakeholders. It also provides uniform KPIs to look at in case of potential secondary trading – sale or purchase of positions in individual borrowers – in bonds or loans.
We also see the framework having wider application outside registered providers – for instance, to local authorities, which are also large owners of housing stock.
It is worth noting that the ESG journey for most housing associations is at its infancy, but we see adoption by borrowers and investors moving at a rapid pace in the sector.
Hear from key stakeholders involved in bringing ESG to the built environment and placemaking at the Impact Investment and ESG conference, taking place on 15 October 2020 online. To find out more click here.