COMMENT As a lender, we believe we have an obligation to consider the wider economic, social and environmental impact of the developments we finance. Therefore, we have spent much time and thought developing our ESG strategy.
The consideration of ESG as vital factors within the commercial world has been an encouraging and long-overdue development. But while the acronym now holds enormous sway over the financial world and is increasingly at the forefront of corporate decision-making, its explosive growth has to date been somewhat lopsided.
Given the climate crisis the world is facing, society has justifiably focused much of our attention on the “E” in the equation, working to decarbonise and reduce our environmental impact. Real estate finance has clearly begun to implement changes alongside this shift, with climate risk a key underwriting consideration, and a growing range of green finance products, bolstered by government initiatives, enabling the industry to make rapid progress within a short space of time.
While the “E” continues to be a vitally important consideration, events of the past year have brought the importance of “S” more sharply into focus. The collective impact of a global pandemic and the dramatic changes it has brought to all our lives has intensified the focus on how organisations treat their stakeholders. In tandem with this has been the rise of diversity and inclusion-focused protest movements, which have fed into this climate of rising social consciousness. In these unique times where awareness of social injustices and the expectation for organisations to positively impact their communities have grown, there is a palpable sense that “S” is having a moment.
Tough to track
The “S” has been hindered by key issues of definition and measurement where, unlike environmental data, which has historically been more quantifiable, definitions and metrics for social impact are significantly harder to identify and track. A 2019 global ESG survey by BNP Paribas revealed that 46% of investors surveyed found the “S” to be the most difficult to analyse and embed.
The recently launched Loan Market Association’s Social Loan Principles – a set of voluntary recommended guidelines for lending that support social value creation – represent progress towards accurately capturing the “S” in ESG for lenders. The SLP offer a much-needed framework to help market participants understand the characteristics of social value and, therefore, what constitutes a social value loan.
Providing affordable housing is an area where the real estate industry can provide significant value to communities, for example. Other examples quoted in the SLP include the financing of projects that give access to essential services (education and training, public healthcare, energy); employment generation programmes, including through SME financing; food security and sustainable food systems; and social economic advancement and empowerment (equitable access to assets, services, resources and opportunities).
The LMA also details examples of target groups – for example those living under the poverty line; excluded or marginalised populations; migrants; unemployed, women or sexual gender minorities; ageing populations and other vulnerable groups as a result of natural disasters.
As with the Green Loan Principles, the SLP provide a consistent set of market standards and guidelines which set out best practice. They are based on four key components: use of proceeds, process for project evaluation and selection, management of proceeds and reporting.
Common good
Explaining the rationale for the launch of the SLP, Hannah Vanstone from the Loan Market Association said that it could “help to catalyse the financing of projects with positive social outcomes throughout the market”.
In real estate finance, she added, there is an opportunity for social loans to fund affordable and social housing projects, with the potential “to transform communities and bring about positive social change”.
We hope this framework will help financiers at large, and of course in real estate, to categorise their lending activities so there is better quantification and reporting where finance is being provided for social value creation, and also for lenders to look at their lending strategy again and develop innovative new loan products, using the SLP, which proactively encourage social value creation for the common good.
Karen Dunstan is general counsel at Precis Capital Partners
