The scope of environmental, social and governance (ESG) reporting and funder due diligence can cause quite a headache. But several publications last week gave us reasons to hope.
Sustainability for Housing issued its second annual review of usage of the Sustainability Reporting Standard for Social Housing (SRS). The SRS was launched in November 2020 as a voluntary reporting framework to enable housing providers to report on their ESG performance in a transparent, comparable and consistent manner. It was developed collaboratively by certain social housing providers, funders and other stakeholders in the sector. It has now been in operation for over 2 years, with 49 reports prepared under the SRS in its first year of operation, and 64 reports in its second year.
The second annual review of usage pushes the SRS to the fore, and it contains some promising feedback from housing associations and funders, including:
- provision of an SRS report seems to significantly reduce funders’ ESG due diligence requirements, and funders are able to extract most or all of the information they need from an SRS report;
- use of the SRS is causing an acceleration of planned ESG-related actions;
- housing associations that are reporting for the second or third time are finding it easier to complete the report;
- housing associations of all sizes, from the smallest to the largest, are now committed to reporting against the SRS annually;
- a majority of housing associations did not require external support to produce their reports, though some did seek assistance with environmental data, report drafting and design, and general consultancy; and
- funders say it leads to better and more useful information on ESG performance from borrowers, and has laid the foundation for accountability.
Sustainability for Housing is currently finalising an updated version 2.0 of the SRS for use from January 2024. The SRS has potential to provide an overview of ESG performance within the social housing sector as a whole and, in due course, sector-wide reference points and benchmarks. However, for the SRS to achieve its full potential, a large-scale increase in formal adoptions will be required.
The second important sustainability reporting development last week was the publication by the International Sustainability Standards Board of its inaugural standards—IFRS S1 and IFRS S2 (the ISSB Standards) — relating to sustainability-related disclosures in capital markets. The UK government has consistently signalled its strong support of the ISSB Standards and has already begun work to align present and proposed national disclosure standards to the ISSB Standards.
IFRS S1 provides a set of disclosure requirements designed to enable communication to investors about sustainability-related risks and opportunities over the short, medium and long term. IFRS S2 sets out specific climate-related disclosures and is designed to be used with IFRS S1. The ISSB Standards are designed to ensure provision of sustainability-related information alongside financial statements, in the same reporting package.
The ISSB Standards incorporate the recommendations of the Taskforce on Climate-related Financial Disclosures (TCFD) and they state that compliance with the ISSB Standards will also constitute compliance with the TCFD requirements. Funders have been legally required to report against the TCFD framework since April 2022, which in turn impacts the ESG-related information they require from borrowers. By way of example, the Investment Association Governance and Disclosure Guidelines for Housing Associations seeking Funding from Capital Markets published in November 2022 recommends that social housing issuers make disclosures in line with TCFD requirements. Some housing associations have voluntarily adopted TCFD-aligned disclosure in the spirit of “best practice”. Whether or not legislative requirements extend to housing associations, the ISSB Standards are, likewise, likely to be passed on via funder due diligence requirements or may otherwise be adopted as “best practice”.
Thankfully, version 2.0 of the SRS will not only take account of feedback from participants but will also seek to facilitate ongoing alignment with relevant reporting frameworks and regulatory developments, including the ISSB Standards. This will continue to assist the social housing sector in the mammoth task of compliant sustainability reporting and satisfaction of lender due diligence.
Finally, the International Capital Markets Association (ICMA) has, last week, published updates to its suite of guidance for ESG-linked bond financing arrangements. The ICMA principles are general accepted across the mainstream capital markets and are mirrored by the Loan Market Association in their corresponding principles applicable to the loans market. They are a useful tool to inform sustainability frameworks and ESG reporting. These updates include a new version of the Sustainability Linked Bond Principles and the Social Bond Principles. In contrast to the SRS and the ISSB Standards, which pertain to general ESG reporting by borrowers, these voluntary principles pertain to the characteristics of debt securities issued in the capital markets that bear these labels. “Social Bonds” are fundamentally characterised by the proceeds being limited to use for “Social Projects”, and “Sustainability Linked Bonds” are general purpose loans that include a financial incentive (in the form of a margin ratchet) for performance against tailored, measurable and ambitious ESG metrics. Social impact has been notoriously difficult to articulate and measure to date, and one way in which these documents will be of assistance is to provide guidance on impact reporting for social projects and KPIs.
Please contact Rachel Orgill-Harris with any queries.
Devonshires has a multi-disciplinary Sustainability and Decarbonisation team of expert lawyers covering all aspects of commercial enterprise, construction, corporate, development, finance, governance, and procurement who specialise in supporting clients with their sustainability, decarbonisation and ESG objectives and how they plan to approach their journey towards net zero carbon/greenhouse gas emissions.
