Another year, another sustainability-linked loan (SLL) from a UK
housing association. In fact, in the past two years, four different UK housing
associations have launched SLLs – loans whose structure is designed to give
borrowers an incentive to reach agreed sustainability targets: L&Q, Optivo, Peabody and, most recently,
Clarion, with a £100 million revolving
credit facility. Why have SLLs proved so popular in this segment of the
not-for-profit sector? David Reynolds, a Senior Banker at BNP Paribas, explains
how they work – and what is driving their success.
Hello David, thanks for talking to us. First, tell us about SLLs and how Clarion’s loan works.Sustainability-linked loans (SLLs) are loans in which a component of the interest rate depends on the borrower meeting specified social impact or sustainability-based key performance indicator targets agreed with the lender. These loans are drawn for general corporate purposes as each housing association pursues its mission to provide affordable housing across the country. In the case of Clarion, the indicator that has been chosen is based on helping an agreed number of people into employment. If the target is met in the timeframe agreed, Clarion will benefit from a lower interest rate on the loan. Conversely, if the target is missed, Clarion would pay a higher interest rate.
This is the fourth SLL arranged by BNP Paribas for a UK housing association in two years. What’s driving this momentum? Why are SLLs so suitable for this sector?As an independent not-for-profit sector, housing associations have a longstanding history of social initiatives. Pursuing a social purpose is deeply rooted in their DNA. The challenge is to find a way to integrate this into their financing strategy. Nearly all housing associations work to support their residents across a range of initiatives; however not all organisations have the systems in place to report on this. As the sector continues to grow and look for new sources of funding, we see that this is starting to change.
Is it the role of banks to incentivise housing associations’ social purpose?We believe banks, which have the technical know-how, can play a vital role in helping them achieve their goals. BNP Paribas re-entered the sector in 2018 and has had the privilege of working with several UK housing associations to provide funding through individually tailored SLLs.
Pursuing a social purpose is deeply rooted in housing associations’ DNA. The challenge is to find a way to integrate this into their financing strategy.
In the past 18
months, the sector has evolved to include – for the first time ever – structures
linked to social purpose. For us, this is about partnering with housing
associations for the long term and supporting their continued growth, as well
as a drive to improve residents’ and communities’ quality of life, health and
How do you see the sustainable lending model evolving?Historically, sustainability was not a major point of focus during financing discussions with our clients. In recent years, this has shifted dramatically, with a clear institutional focus on partnering with clients that demonstrate a strong commitment to sustainable change, and the bank choosing to move away from challenging sectors such as tobacco. The sustainable capital markets have now developed to such a point that borrowers have the choice of different ESG funding options across the bond and loan markets. This also, of course, serves the needs of investors, whose appetite for ESG-compliant assets continues to grow, driven by shifting societal attitudes.
What needs to happen for sustainability to be fully integrated across UK housing associations?There is a lot of overlap in the work undertaken by UK housing associations, many of which partner with each other. With more collaboration, it would be conceivable to see a sector-wide framework that could encompass all aspects of their ESG progress. We expect the sustainability trend to go from strength to strength. Our discussions with clients continue to focus on their sustainability agenda, and we consider there is a good opportunity to incorporate more sustainability-linked features to support funding for the public housing sector. In particular, we expect these funding instruments to develop beyond bank loans and into the capital markets.
About David J. Reynolds
David J. Reynolds is currently a Senior Banker within Corporate Coverage where he covers a portfolio of UK-based FTSE 100 & 250 companies including the UK Housing Association sector.