Sustainable Finance: Governance Meets Opportunity

The social housing sector is well acquainted with sustainable finance products. Sustainability linked terms are common features of loan and bond financing and have proven to be mutually beneficial to both lenders and borrowers seeking to promote and advance their sustainability credentials. Until recently, sustainability-linked loan products have dominated the ESG finance space, due to their inherent features that reward material, ambitious, predetermined sustainability-linked achievements while allowing loan proceeds to be used for the general corporate purposes of the borrowing organisation. As the market has developed, the Loan Market Association (LMA)’s Sustainability Linked loan Principles (SLLPs) have become an established benchmark requirement.

Now the market is witnessing the emergence of new loan products linked to the LMA’s Social Loan Principles (SLPs) and Green Loan Principles (GLPs). The last 12 months have seen a flurry of offerings of green loan products, underpinned by partial guarantees from the National Wealth Fund (NWF), from well-established lenders to the sector, offering advantageous loan terms to facilitate decarbonisation works to social housing stock. This summer NatWest has additionally launched a £500 million social loan facility offering no arrangement fee and below-market interest margins to existing customers, designed specifically to support the development of social rent homes. 

These products are not a replacement for sustainability-linked loans, but rather a complementary tool – particularly suited to capital projects with clear social outcomes. They present a timely and strategic new opportunity for housing associations in their commitment to improving the supply and environmental impact of social rent homes.

The Social Loan Principles and Green Loan Principles: Frameworks for Impact

The SLPs and GLPs provide high-level frameworks for structuring loans that finance projects with positive social and green outcomes respectively. Each set of principles are built around four core components:

1. Use of Proceeds – SLP loan funds must be exclusively allocated to eligible social projects. For housing associations there is a clear use case, aligned with their charitable objects, whereby the social loan proceeds are utilised in building or acquiring additional homes for social rent. And, as the label implies, GLP loan funds must be used exclusively for eligible green projects. In the context of the NWF-backed offerings, this generally means loan proceeds are ring-fenced to fund energy-efficient heating, insulation, solar panels or biodiversity enhancements to social housing stock.
2. Process for Project Evaluation and Selection – Borrowers must clearly define the objectives of the funded project and the criteria used to assess its eligibility.
3. Management of Proceeds – Funds must be tracked separately, often via dedicated accounts, to ensure transparency and integrity.
4. Reporting – Borrowers are required to provide regular updates (at least annually) on how proceeds are used and the social (in the case of SLP-based facilities) or environmental (in the case of GLP-based facilities) impact achieved.

Reporting: a Challenge and an Opportunity

Terms that align with the LMA principles may seem daunting – especially for smaller associations. Reporting and assurances that satisfy the SLLP, SLP or GLP entail additional governance, expertise and resources. Some may find it challenging to justify the additional cost of impact reporting for funded green and social projects, particularly where the projects do not yield any immediate or direct additional income for the association. 

However, we predict that the long-term benefits of robust data management and impact reporting will be substantial. The expansion of high-quality data collection and management to include sustainability metrics and project outcomes will strengthen governance and improve access to capital. It will not only satisfy lender requirements now but also prepare associations for any extension of mandatory sustainability reporting that may be implemented in the future.

By way of example, albeit across a different sector, in August the Financial Conduct Authority (FCA) released its findings following a review of the impact of climate-related reporting, which has been mandatory for certain FCA-regulated entities since 2021. The FCA found that the disclosure rules have helped firms to consider risks, build their capabilities and integrate risks and opportunities into their strategies. The rules have also helped firms to be more transparent with their clients and consumers. These lessons can be applied regardless of sector.

Turning Principles into Progress

The extension of principles-based lending marks a new chapter for sustainable finance in the social housing sector. Whether financing new social rent homes, funding the retrofit of existing stock, or leveraging ambitious sustainability targets to secure more favourable corporate loan terms, housing associations have access to a growing range of loan products that reward transparency, measurable impact and long-term sustainability. 

For finance teams and contract managers, this means adapting to new documentation standards, reporting obligations and governance expectations. But more importantly, it means unlocking capital on better terms and moving into a stronger, more resilient position. By embedding strong governance, harnessing quality data and embracing transparent impact reporting, borrowers will be better equipped to meet sustainability challenges and to seize opportunities as they arise.