ON INCOMPLETE INFORMATION, PUBLIC SHAMING, AND SHUNNING WRAPPED IN MORAL RHETORIC,” IS IT TIME FOR THE SOCIAL HOUSING SECTOR TO STEP UP AND MAKE ESG AOK?
Six months ago, The Economist[quoted Hester Peirce, the main regulator at the US Securities and Exchange Commission, on the scoring systems used to test company’s performance on Environmental Social and Governance (ESG). ESG is now a key part of how investors rank companies and with the social housing sector well along the road of seeking investor cash, how is it doing?
In one sense it is easy for the sector to score brilliantly in terms of ESG. If we compare ourselves to businesses like energy companies, what we do is inherently good socially and environmentally right?We house low income households, our homes are the most energy efficient of any housing sector, and we do some great stuff in terms of environmental innovations. Job done and time to go home and feel great about ourselves.
But this misses the fundamental point of what ESG is and why investors are now demanding more from clients.
Before we answer that, a little bit of history. Around ten years ago when I was the sustainable development lead for one of the largest housing providers in UK, we set ourselves the task of finding a way of testing and reporting our environmental performance. We wanted to be able to report on our performance for investors and partners and we wanted that reporting to have currency inside and outside the social housing sector. We looked at all the reporting mechanisms around at the time including ISO14001, EMAS and SHIFT.
In fact, we ended choosing two simply because one mechanism did not deliver all that we needed. The first one was IS014001 and we were amongst the earliest housing associations to ever achieve the standard. It allowed us to show to partners, particularly local authorities, that we were measuring our performance and that is externally verified. ISO14001 I am glad to say is now used widely in the sector. But we chose a second standard as well because even though ISO has cross sector and indeed internal currency, it is very tightly focused on some very specific issues: we wanted to look at how we performed as an organisation and to be challenged as if we were a regular business. It was for this reason we also chose the Business In the Community CR Index. This threw up challenges that are now becoming apparent to the sector as it takes the first real steps to ESG.
We spent what felt like hours, and if I am honest days, trying to work out how to look at our performance as a business on social and environment issues when our product – housing – is fundamentally social and economic. For regular businesses selling products and services, they focus less on the products and more on how they operate as a business. But we seriously struggled – along with Business In The Community – with how to meaningfully measure our environmental and social performance beyond a simple measure of the state of our homes.
In one sense it is easy for the sector to score brilliantly in terms of ESG. If we compare ourselves to businesses like energy companies, what we do is inherently good socially and environmentally right?We house low income households, our homes are the most energy efficient of any housing sector, and we do some great stuff in terms of environmental innovations. Job done and time to go home and feel great about ourselves. But this misses the fundamental point of what ESG is and why investors are now demanding more from clients.
What we have seen with private sector investor and construction partners is a very different perspective on ESG, which is why they have been taking it seriously for much longer than the social housing sector. What became clear to us is two things.
Firstly, investors see ESG as a powerful proxy for a well run business. If they are able to measure, monitor and report on their performance on a wide range of issues it shows they understand what is happening in their business, that they can bring the team together on key issues and that they can deliver. They are in charge of their destiny and know how to deliver it.
The second reason is actually three reasons – reputation, risk and reward. They understand that unless they are on top of ESG they run a significant reputational risk for their business. It doesn’t mean they have to be perfect and be ‘nice’, but it does mean they have to understand what they are doing, what those impacts are and that they are making progress on them. As they say ignorance is not a defence but showing you know something is a problem AND you are willing to deal with it is much more defendable.
The other issues are two sides of the same coin – risk and reward. What Boards want to know is what things are on the horizon that are a risk for the business and if there are actually any opportunities and commercial rewards to this. They want to know what the risks of climate change are to them – new regulation, new standards, flooding and overheating to name a few. This needs to be managed. But this also creates an opportunity – if this is the direction of travel what do we need to do to get ahead of the competition? Should we start investing in new products and services so that we can deliver them at better value and performance than others? It becomes clear that ESG is not simply a matter of recording lots of KPI’s and reporting them. It is also a way of managing their business better and a way of adding value – real financial value.
So, ten years down the line since we slogged our way through the existential questions of what it meant to be a social housing provider, how is the sector doing? Over the last few weeks I have seen the first steps of the sector really starting to grapple with this. Back in May, The Good Economy, along with a number of housing providers and investors, launched a ‘white paper’ on building an ESG standard for the sector. I have been really impressed by the approach and was reminded of this at an online seminar this week. I am impressed because they are taking an open and honest approach about what is needed and want to get the sectors feedback on what is needed. However, there is the ever present risk that they experience the same seemingly never-ending debates that we had.
It’s early days and there is a journey to go on, but this is a real opportunity for the social housing sector to come from a position of massively lagging behind the private sector to becoming a well-deserved front runner. But it must also learn the lessons of the private sector and not get lost in some of the debates that we had all those years ago.
Let’s remember, our sector has a huge inbuilt advantage when it comes to the environmental and social. We could just pull any annual report from the last ten years off the shelf and show it has done more than the vast majority of private sector organisations. No, the real challenge for the sector lies elsewhere.
Firstly, we must remember what ESG does for the private sector, not only its role as a good management proxy for investors (and for regulators of course) but also as a tool for adding value to the organisations, identifying what it means in terms of the three R’s – Reputation, Risk and Reward. What is the landscape in which we are operating and what are the issues coming down the road? The biggest and baddest is climate change and this is simply not going away, but what can be done to turn this into a reward? Although the sector is currently reacting to this agenda, we are beginning to see leading providers planning for this. But this can only be the first step. As a sector, we now need to see how we can invest in research and development, take control of the agenda and make it work for us and our customers.
And this is the ESG challenge for social housing – not to focus on the environmental and social but to go deep on the governance. The environmental and social are the sector’s products – this is the easy bit. There is a risk that this makes the approach on one hand lazy or on the other to go down a million and one rabbit holes about what to measure whilst missing what the real challenge is: how to create great organisations and businesses. In order to deliver those products and in order to impress investors, the sector needs to show how well it is managing now and how they are going to grow and thrive for the next fifty years.
Postscript. So how did we do with our hours of existential angst? We were the first housing provider to get on the CR index and after three years of hard work by a great team we finally reached platinum standard.
The White Paper ‘Building a Sector Standard Approach for ESG Reporting’ is here
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Nicholas Doyle is a Director of Adecoe a leading provider of energy and sustainable development services to the social housing sector. firstname.lastname@example.org