Is there green finance pressure on housebuilders to decarbonise?

Lenders, investors and shareholders are putting increasing pressure on housebuilders to decarbonise

Sustainability and environmental principles now form a pivotal role in investment decisions driven by a wider shift in stakeholder attitudes and accelerated by Covid-19. There is increasing pressure to decarbonise from all angles including from investors, lenders, shareholders and government. Currently 30% of the shareholders of major housebuilders have an ESG focus. So housebuilders will need to roll out and advance environmental strategies and report on their progress.

Stricter policy and regulatory context

Sustainability and decarbonisation have grown in importance. Increasingly they influence government policy, financial and investment decisions, as decision-makers seek greener finance. Green finance is often used as an umbrella term and includes both green loans and sustainability linked loans. Green loans are used for a particular qualifying green purpose. Sustainability linked loans are where a company raises financing for corporate purposes tied to a set of sustainability performance targets or covenants.

This momentum for greener finance is gathering pace. In the March budget, the UK’s first sovereign green bond, a green retail savings and investment product and the new UK infrastructure bank were announced.

There is also greater demand for transparency in sustainability reporting. The Government plans to introduce mandatory reporting of climate-related financial information across the economy from 2025. And some requirements are in place for listed companies as early as this year. These government regulations will force the private sector to disclose their approaches to ESG. Within the development sector, policy is also increasingly harnessed to decarbonisation such as through the Future Homes Standard. This will require new homes built to produce 75–80% less carbon emissions compared to current standards from 2025.

Investors redistribute capital to green investment

On average, at least 30% of shareholders of the major housebuilders have an ESG focus, based on recent analysis of the top 10 shareholders of the PLC housebuilders. These shareholders have all made some form of commitment to environmental sustainability and reflect this in their voting decisions. A growing share of these investors in the housebuilding sector, including BlackRock and Aviva, are pursuing greener portfolios. This puts pressure on housebuilders to operate more sustainably and deliver greener homes.

The chief executive of BlackRock published an open letter in 2020 announcing that ESG considerations were now at the forefront of its investment priorities as climate risk is increasingly recognised as investment risk. More recently, the 2021 letter cited that Covid-19 had accelerated the need to reallocate capital to sustainable businesses. BlackRock will require companies to disclose their climate plans aligned with the Paris Agreement and will increase scrutiny of those failing to take sufficient action. In April 2021, BlackRock also announced its ‘Decarbonisation Partners’ fund with Temasek. It will commit an initial $600 million to advance investment in low-carbon technologies including in the building sector. This announcement marks how shareholder attitudes are driving change, innovation and collaboration. And how this is fuelling the move towards greener finance by larger global investors.

In February 2021, Aviva Investors announced new requirements for firms to deliver net zero Scope 3 emissions by 2050 with the threat of sanctions imposed on those non-responsive companies. This is alongside Aviva Investors’ pledge to raise £1 billion in sustainable transition real estate debt loans by 2025, which has seen a strong response from borrowers. In addition to growing expectations of more responsible investment, the leading investors are prepared to dissociate investment from non-compliant firms.

Banks focus on greener lending

Many lenders are also accelerating their transition to green finance. As many of the main banks provide debt finance to housebuilders, this shift in their business model increases the responsibility of housebuilders to take action. Most of the major lenders have committed to net zero emissions targets, launched green products and tightened lending conditions.

Most of the major lenders have committed to net zero emissions targets, launched green products and tightened lending conditions

Lydia McLaren, Associate, Residential Research

As part of their ESG strategies, many banks such as Barclays, Natwest and Lloyds are focusing on reducing emissions through consumer lending. They have introduced green mortgages for energy-efficient homes with higher EPC ratings. Natwest also funds green home improvement loans and have launched a carbon footprint tracker for customers.

Banks are also funding green commercial lending initiatives ranging from green loans to green revolving credit facilities including for SMEs. HSBC emphasises that pressure from shareholders is forcing the bank to limit its financing of fossil fuel companies. The major lenders are rapidly accelerating their climate targets as well as supporting companies to reduce emissions.

What can we learn from other countries?

Many countries are advanced in their development of green finance and green housebuilding initiatives. Sekisui House, a volume housebuilder in Japan has been achieving zero emissions at its factories since 2002 and construction sites since 2005. In 2019, 87% of Sekisui detached homes were built to its net zero ‘Green First Zero Homes’ model. The Clean Energy Finance Corporation, an Australian government-owned bank, has invested $10 billion in green projects across sectors. This includes green home loans, build to rent and retirement housing, stimulating investment in green housebuilding and retrofitting. In the Netherlands, Energiesprong retrofits existing homes through pre-fabricated refurbishments. The initiative has fuelled improvements in regulation, access to finance and investment in modern methods of construction. In Germany, government-owned banks such as KfW have a central role in driving improvements in energy efficiency of existing and new stock through a programme of grants and loans.

Housebuilders need to respond to stakeholder pressure

Lenders, investors and shareholders are putting increasing pressure on housebuilders to decarbonise. Many major housebuilders are already adopting green housebuilding measures to improve the energy efficiency of their homes and operations.

All listed housebuilders are legally required to report on Scope 1 and Scope 2 emissions defined as direct carbon emissions and emissions from their purchase of energy. But reporting on Scope 3 indirect emissions is much more limited and inconsistent. The average change in Scope 1 and Scope 2 emissions for housebuilders reduced by 11% per home in 2018-19. But it increased by 35% from 2019 to 2020. Fewer completions in 2020 due to Covid-19 disruptions has in many cases led to an increase in carbon intensity making it more challenging for housebuilders to reduce their carbon footprint (see chart, below).

As well as facing increasing regulation, housebuilders have explicitly noted the growing expectations amongst shareholders to align their strategy to demonstrate ESG credentials.

Despite concerns over the subsequent higher build costs, margin pressure and impact on land values, this demand for green housebuilding is here to stay. So housebuilders will need to significantly accelerate their strategies to reach net zero emissions and retain stakeholder confidence.

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