ESG investment is creating opportunities for affordable housing; this is why builders should pay attention
By MANUEL H. LAZEROV
ESG (environmental, social, and governance) factors are increasingly driving investment decisions. While generating a great deal of genuine investor interest, ESG has only attracted a small fraction of the possible investment dollars that are available. New funds, however, are being created specifically for those types of investments, but the amount invested is very small compared to the magnitude of traditional investments, for a variety of reasons. One reason is the lack of viable projects.
There are housing types that fit the criteria for ESG investors, namely workforce and non-profit housing. Builders and developers will be the beneficiaries an expanded pool of funds available to them, since their mortgages will be used to collateralize new bond issues.
In fact, they are in an especially unique position to do so, simply because there are obstacles for other types of projects that are difficult to qualify as ESG investments.
The following is a description of some those obstacles.
Lack of clarity as to metrics
While the demand from women and millennials for ESG projects is impressive, there is no clear definition as to what constitutes ESG metrics. The investment community needs greater clarity than what presently exists. It’s not a matter of not investing in tobacco or oil companies, but creating something that has a social benefit, which is both economically sustainable and establishes one’s reputation of being a responsible corporate citizen.
Workforce housing bonds as a pure ESG investment play
Many corporations have signed on as a means of reducing expenses. But, even when they do, that does not turn specific projects into pure ESG investment opportunities for funds—such as when an oil company reduces its carbon footprint. Workforce and non-profit housing is a pure ESG play, which invigorates our communities; provides very needed housing to supplement that which the federal, state, and local governments are struggling to provide; and, creates more diverse housing for a segment of our communities which are very underserved. Its social impact is highly visible and can deliver benefits in a very short period of time.
Social and environmental impacts
Builders and developers can have both a social and an environmental impact. Frequently, just going a bit beyond what the local building codes require builder to do will allow one to qualify their building as green. The expectation of lower ownership costs for buyers acts as an incentive. For the agencies that rate housing bonds, economic and social sustainability has becoming increasingly important.
Workforce and non-profit housing provide easily understandable benefits to which the investment community can relate, and for which there are historical benchmarks as to their economic sustainability and competitive investment returns. Not only that, there are limitations on how much of these types of housing can reasonably be developed, so that the creation of a bubble is of little concern.
For ESG to be more broadly accepted as an investment vehicle, projects will have to meet the traditional thresholds of advisors and investors, meaning that these investments must maximize returns like any other investment. Even highly conscious social investors, in the end, insist on that. Workforce housing has a proven track record.
The general perception is that ESG investing would be more readily acceptable if individual initiatives could be more easily benchmarked for performance, because the perception is that responsible investing often means that projects only generate sub-par returns. By contrast, workforce housing, which is a fairly new term for a decades old business, it and non-profit housing have been meeting sustainability criteria for years, making it a very predictable and socially responsible investment opportunity for developers who own those properties and for investment bankers who aggregate real estate loans as collateral for bond issues.
To summarize, in order to generate greater investment appeal, ESG projects will have to meet specific investment criteria, namely: (1) The project must be easily understandable, (2) The sponsors must be able to clearly articulate how projects meet social and economically sustainable criteria, and (3) How they generate competitive investment returns. Builders and developers now have an even greater opportunity for financing their projects with the advent of ESG.
Manuel H. Lazerov is President of Infrastructure Financial, Inc. He may be reached at email@example.com or 410-531-3500.