Sustainability based funding is becoming increasingly prevalent in the social and affordable housing sector with mutually beneficial outcomes for all parties involved.

Gavin Reid
Associate Director, Scottish Widows
11 January 2022
4 min read

Investing in Link

As a business, one of our goals is to make the UK housing sector better for everyone. While we might be known for the provision of mortgages in the private sector, we really do mean everyone - which is why we invest in the social housing sector too. One of our business commitments for 2021 was to provide £1.5 billion of new funding, including £500 million in ESG-linked funding, in support of the social housing sector as part of our mission to Help Britain Recover.

As part of this activity, Scottish Widows has recently invested £80 million with the Link Group; the second largest Registered Social Landlord (RSL) in Scotland with c.13,000 homes under management. This loan will help to provide long term funding to support their affordable homes development programme – which will ultimately deliver c.3,000 of new homes over the next five years.

This is a long term investment in a large Scottish social housing provider where funding will be used to support the development of much needed affordable homes, create communities and support jobs. Link are also a charitable organisation whose core values and aims include community regeneration, financial advice and inclusion and employability and training services (delivered through their group companies). By supporting the provision of these new homes, were not just helping to provide places to live - we’re also supporting whole communities and livelihoods.

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"Scottish Widows has recently invested £80 million with the Link Group; the second largest RSL in Scotland."

Sustainability Linked Loans

This loan will be the first Scottish Widows social housing trade done as a Sustainability Linked Loan – meaning that Link will benefit from improved pricing in line with performance against a number of Sustainability Performance Targets. Sustainability-based funding is becoming increasingly prevalent in the social and affordable housing sector, with mutually beneficial outcomes for all parties involved. Investors and lenders are keen to evidence support to a sector with strong Environmental Social and Governance (ESG) credentials which, in turn, helps them deliver on their own sustainability objectives (for example, Scottish Widows was the first major UK pension provider to target net zero across all investments - a goal it is looking to achieve by 2050).

For registered social landlords the availability of sustainability based funding can provide an additional source of private debt finance, typically with commercial incentives in the form lower pricing – which is an important consideration over the life of a long-term loan. Amongst other things this funding can then be utilised to support the development of energy efficient new homes, or for the retro-fitting of existing stock; therefore closing the sustainability loop.

There are a range of different sustainable financing routes available, from green and social bonds, through to these Sustainability Linked Loans. The latter typically rewards performance against a pre-defined set of ESG based targets. These targets might be based around investing in the decarbonisation of housing stock, community regeneration or social inclusion activities. In all cases the agreed targets should be both ambitious and measurable.

"Scottish Widows was the first major UK pension provider to target net zero across all investments - a goal it is looking to achieve by 2050."

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Making sustainable investment easier for businesses

A common theme across all forms of sustainable financing is that it needs to start with a plan which will ultimately evolve into a Sustainability Strategy (either standalone or embedded within the wider group corporate business plan). Whilst the larger registered social landlords typically benefit from dedicated resource and capacity to develop Sustainability Strategies in-house, there are also numerous third party specialists operating in this space.

It is therefore important that RSLs who are considering raising sustainability-based funding start the process to develop their strategy sooner rather than later, as the Sustainability Performance Targets which will form the basis of this financing should be core to their future plans.

The recent publication of The Sustainability Reporting Standard for Social Housing will undoubtedly assist the entire sector in this journey. Both Scottish Widows and Lloyds Bank were Early Adopters committing to this Standard.

It is inevitable that the sustainability agenda will change over time as existing decarbonisation targets are met or as they evolve in line with new technologies, opportunities or environmental threats. Funding from institutional investors typically provides long-term support (up to 40 years is not uncommon) and therefore Sustainability Performance Targets within loan documentation will either be refreshed or replaced with an entirely new set of measurements at intervals over the life of an agreement.

Given this new dynamic, there will undoubtedly be increased importance placed on the ongoing relationship between the client and the investor which will result in an enhanced level of discussion around these shared objectives. This means that factors such as an investor’s engagement model, their depth of experience in the UK social housing sector and flexibility to respond to the constantly changing internal and external environment will be crucial factors when selecting a long-term investment partner. It’s also vital that investment partners are aligned on their long-term sustainability goals, so that they can work together to achieve this outcome.

At Lloyds Banking Group we’re conscious that, as one of the UK’s largest financial institutions it’s up to us to help lead the way in bringing about sustainable change in the finance sector. Last year we became a founding member if the Net Zero Banking Alliance, and are currently ranked sixth on the Financial Times list of Europe’s Climate Leaders. In line with our mission to Help Britain Prosper, we’re conscious of finding new opportunities to invest in communities and infrastructure that can bring about environmental and social good to the UK.


Gavin Reid
About the author Gavin Reid

Associate Director, Scottish Widows Loan Investments

Gavin joined Lloyds Banking Group in 2001 and has worked in a wide variety of roles including Commercial Relationship Banking, International, Business Support and Credit.

In 2019 he joined Scottish Widows as an Associate Director within the Loan Investments team, who are responsible for identifying and transacting long term investments across a range of asset classes on behalf of the Annuity Fund.

His focus is the UK Social Housing sector in which Scottish Widows has a significant loan exposure of £3.5bn and ambitions to grow this further. Sustainability is at the heart of this strategy, with Gavin leading on work to provide clients with tailored sustainable financing, which provides both funding and incentives to support customers with their journey to net-zero and achievement of their other ESG objectives.   

Gavin is a Chartered Banker and prior to joining the Group graduated from the University of Edinburgh with an MA in Politics.

Gavin's background Close

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