New Developments: Embracing ESG in 2022

As I write this column in mid-December, full of holiday spirit and optimism, I remain hopeful that Build Back Better (BBB) will at some point be enacted into law and we will be the beneficiaries of the broadest expansion of the Low Income Housing Tax Credit since the program’s enactment, despite the recent pronouncements of one senator.

Equity syndicators seem to be pretty confident in their ability to ultimately place all these new tax credits with investors but there is some expectation that, at least in the short-term, yields and equity pricing will have to adjust to account for the increased supply. Additionally, with an expectation that development, acquisition and construction costs are all continuing to rise in 2022, expanding and deepening the LIHTC investor base, particularly among Environmental, Social and Governance (ESG) investors is an important industry priority.

Why ESG? Because that’s where the capital is! Over the past several years, environmental, social and governance factors have become an increasingly important consideration for major institutional investors, including banks, insurance companies and pension funds as they determine their capital allocations and individual investment options.

Theoretically, as the “original” triple-bottom line investment (a sustainability framework that values profit, people and planet) affordable housing should be very well positioned to attract ESG dollars. For starters, LIHTC investments typically out-perform other types of commercial real estate – the yields are great and the foreclosure rates very low. Furthermore, because of emphasis in most Qualified Allocation Plans for green building standards and sustainability, affordable housing as compared to other real estate tends to be more climate friendly. On the social side, we are an industry that serves low- and extremely low-income individuals and often brings in social and healthcare services. We also create numerous construction and permanent jobs in the community (often enhanced by Davis Bacon, Prevailing Wage, project labor agreements and/or Section 3 requirements) and engage extensively with the local community throughout the design stage (necessary to combat NIMBYism).

From my perspective, we aren’t just hitting ESG singles and doubles – we are knocking the ball out of the park! Yet, when you explore ESG forums or talk to ESG investors, it is not a given that affordable housing is on their radar or that a LIHTC investment will necessarily check their ESG box. I think this is more a matter of perception than results and we need to tell our story differently so that we get the ESG credit we deserve.

We know instinctively that affordable housing has a great ESG narrative – think of all the moving conversations you’ve had with residents about the effect of affordable housing on their lives and community. Unfortunately, these collective stories aren’t easily translated into charts or an infographic in an investment prospectus. These must be supplemented with demonstratable and measurable returns and impacts. The gatekeepers we have to deal with are ROI, KPIs, benchmarks and ratings.

Fortunately, there are many metrics we are already tracking that should appeal to the ESG investor. We need only go to our accounting and property management software to generate reports on units developed, residents served, jobs created, tax-base increased, etc. With a little bit of extra effort we could easily convert other data into environmental metrics, like carbon emissions reduced, water saved, building materials and household waste recycled and resiliency features implemented.

It would also be valuable to work together as an industry to develop uniform metrics for some of the more compelling but harder to measure social outcomes from affordable housing. For example, can we apply data collected by groups, like the Eviction Lab, to quantify the impact of stable affordable housing on previously rent-burdened households that were at risk of eviction? What about quantifying the societal and health outcomes of Permanent Supportive Housing or Affordable Assisted Living? How about educational attainment from resident service programs targeting school-aged kids? Or financial asset building of residents through participation in job training or FSS?   

We have a great ESG story to tell – we just need to spend some time and attention creating a reporting framework that will be compelling and easy to understand for ESG investors. When we do this, there is no reason why our sector should be the ESG investment of choice, which is exactly the position we want to be in as we look to expand our investor base. I am sure this is easier said than done – there currently is not a standardized approach to the calculation of ESG and there are many different organizations that certify on a third-party basis an ESG investment’s value. That also means we still have an opportunity to shape the narrative.