Winckworth Sherwood’s Louise Forrest, James Duncan and Lucy Grimwood discuss the road to sustainable finance for RPs.
Greening Finance: a Roadmap to Sustainable Investing, the UK Government’s policy paper, was released in late 2021 setting out the UK’s roadmap to transitioning to a more sustainable economy.
COP26 saw Rishi Sunak promise to make the UK the world’s first “net zero-aligned financial centre”. The rhetoric is clear: the Government’s aim is to ensure that financial institutions and other investors deploy capital in a way to help the UK meet its net zero commitments and wider sustainability objectives. It expects investment decisions and financial flows to be the carrot and stick that guide the UK economy towards such goals.
New regulation is designed to enable and equip that transition, but what will it mean for registered providers (RPs)?
In summary, all RPs will soon be required by to make ‘sustainability disclosures’ at some level.
These disclosures will be confirmations about their business and its impact on climate change and other sustainability issues. Any RP which seeks funding will ultimately need to show, in a measurable way (whether through key performance indicators or covenants agreed contractually in funding documents or direct regulation) that they are having a positive impact on the UK’s sustainability agenda.
Green the financial system
The roadmap has three phases to ‘green the financial system’. All will require legislation.
Phase 1 is ensuring that investors have ‘decision-useful’ information about sustainability from the entities that they finance or invest in. The roadmap raises concerns about green washing and notes that voluntary sustainability disclosure regimes are currently widespread but often inconsistent; information from different organisations is not always comparable. The focus is on decision-useful, comparable disclosure, which shows a positive ongoing impact on sustainability.
This is regarded as crucial and underpins much of the roadmap. Disclosure will sit within a framework known as the Sustainability Disclosure Requirements, or SDR, which will bring together existing sustainability-related disclosure requirements in a targeted, specific and integrated way. Whilst a degree of interpretation on a sector-wide basis may be useful, the new rules will be based on an internationally focused non-sector specific regulatory framework; and ultimately each RP will be responsible for its own compliance.
Phase 2 is a call to action, to ensure that business and financial decisions are made using SDR and with sustainability in mind.
Phase 3 focuses on investor stewardship, ensuring that financial flows have indeed shifted to help the UK meets its net zero commitment and wider sustainability targets.
The ultimate aim is to ensure that businesses take sustainability into account in all of their decision making, and that they are able to report this in a consistent and uniform way, which investment managers and investors can then use to ensure that capital is applied to sustainability goals.
What should RPs do now?
Governance is key, as is having a strategy to identify, assess and manage sustainability related risks and goals. Metrics and targets will need to be understood and applied throughout the business. RPs will need to understand SDR and the UK Green Taxonomy and how they relate to their own business. Very soon, it will no longer be possible to consider compliance with ESG criteria as a voluntary matter or a ‘nice to have’; it will need to be business as usual.
Social housing providers should be collating data and readying operational systems and business teams to prepare and easily access the information that will be required for this enhanced disclosure. RPs should keep working with advisors who can apply the requirements to decision making throughout their businesses.
In terms of raising finance, RPs will need to be ready to volunteer KPIs or covenants to funders that are aspirational, measurable and achievable and which they are confident will work for them. As the ESG agenda develops, KPIs or covenants will become more standard and if RPs want to be sure that they can comply with these going forwards, they should be considering now, what they can achieve.
Louise Forrest is a Partner and Head of Head of Banking and Finance, James Duncan is a Partner in Corporate and Governance Team and Lucy Grimwood is a Senior Associate in the Housing Finance Team, at law firm Winckworth Sherwood.
