1 NORTHERN LGPS HOUSEBUILDING REPORT | 2019 northernlgps.org XXXXXXXXXX PROCEED WITH CAUTION BUILDING FIRM FOUNDATIONS: ESG RISKS IN THE HOUSEBUILDING SECTOR. 2019 2 NORTHERN LGPS HOUSEBUILDING REPORT | 2019 northernlgps.org SUMMARY CONTENTS There is now broad consensus that the UK faces a severe housing crisis. Housing is now viewed by the public as The housebuilding sector ............. 5 one of the most important issues facing the country. Product and customer risk ............ 6 This focus brings with it huge opportunities for the Customer satisfaction ................... 6 housebuilding industry. However, it also has led to Building standards ....................... 6 growing scrutiny of the way that housebuilders operate. Environmental standards .............. 6 For example, support of housebuilding through Help to Leasehold arrangements ...............7 Buy has not only led to its stated objective of increasing Skills and employment risks ......... 8 output but also criticism that housebuilders have Employment rights and relations .. 8 unduly profited from state support at a time of acute Health and Safety ......................... 8 housing affordability problems. Equally there have also Skills and apprenticeships ............ 9 been questions about the way looser planning regula- Diversity ....................................... 9 tions to deliver more new houses has also reduced Community and social risks .........10 contributions by housebuilders to local communities. Planning gain ..............................10 At the same time the sector has also been singled out Executive remuneration ...............10 for not doing enough to address climate risks. And due Landbanks ....................................11 to the high levels of self-employment, the sector finds Company comparisons itself at the forefront of concerns about precarious work. and conclusions ..........................12 These issues carry with them reputational, environ- mental and social risks, all financially material factors for the Northern LGPS as investors. Furthermore, North- ern LGPS beneficiaries live in a society that is affected by the behaviour of investee companies within the local authorities of the pension funds and beyond. Ensuring high environmental, social and governance standards within the housebuilding sector is therefore financially and socially critical for the North and Northern LGPS. Set against this backdrop, in December 2018 Northern LGPS agreed to undertake an engagement project to examine these risks and engage with companies where it was felt risks were not being address. The following report is the first stage of this work. The report does not name individual companies. Instead, it This report was produced by PIRC on looks at the whole sector by examining the publically behalf of Northern LGPS available material on how companies are addressing the You can contact Northern LGPS at: risks outlined. Guardsman Tony Downes House, 5 Manchester Road, Droylsden M43 6SF Tel: 0161 301 7000 Email: [email protected] @northernlgps 3 NORTHERN LGPS HOUSEBUILDING REPORT | 2019 northernlgps.org MAIN FINDINGS CUSTOMER SATISFACTION HEALTH AND SAFETY EXECUTIVE PAY The long-term sustainability of compa- By the nature of the industry employees Some companies within the industry have nies will depend on their reputation, and face specific health and safety risks at faced specific criticism for the level of an important component of this will be work. All companies disclose that they executive pay. Few companies disclose how they are viewed by customers. have a health and safety policy and most executive remuneration as a proportion of Housebuilders generally provide informa- disclose the number of accidents and average employee pay or, indeed, the tion on customer satisfaction but provide injuries. However, less detail is provided industry average given the sector’s little information or commentary that on whether rates include sub-contracted reliance on contracting. Most companies goes beyond headline survey results. workers, the level of major injuries, or if include metrics for executive pay based external audits on health and safety are on customer satisfaction but a minority BUILD QUALITY undertaken. do on health and safety and none appear Customer satisfaction is likely to also to do so on carbon emissions. include the build quality of new homes. SKILLS However, companies provide few details The housebuilding sector faces specific LANDBANKING about warranties or the levels of claims to skills issues, not least because productiv- Housebuilders have been criticised for enable investors to understand the ity growth within the wider construction the size of their landbanks and slow build quality of products and potential industry has been weak over the last two out rates. Most companies provide financial and reputational risks. decades. Most companies disclose information on the size of a company’s whether they have an apprenticeship land banks. However, few disclose the ENVIRONMENT scheme in place but very few provide average buildout out rate and no informa- Emissions from domestic buildings is a information on how the company’s skills tion is provided on the number of plots major contributor to national carbon policy relates to the company’s approach not being developed by planning status emissions and housebuilders have been to employment contracts and sub- or the value appreciation (or impairment) singled out for not doing enough. contracting or the obligations of of plots not being developed. Companies generally provide information sub-contractors on training. on carbon emissions. However, only a few have plans for capturing Scope 3 emis- DIVERSITY sions – emissions that flow from homes Making the most of the skills available in sold and in use. As such, only a few have the workforce and ensuring strong “Emissions from plans to set science-based targets to be in governance will depend on ensuring line with Paris Climate Agreement. diversity throughout the company. The domestic buildings vast majority of housebuilders have is a major con- LEASEHOLDS disclosed equal employment policies, in Despite the reputational damage to some half of the companies 30% or more of tributor to national housebuilders caused by their leasehold board positions are occupied by women provisions few companies provide details but few set targets to increase diversity. carbon emissions for investors to understand whether this is a risk for the company. PLANNING and housebuilders Gaining planning consents and maintain- EMPLOYMENT RIGHTS ing a good reputation depends on how have been singled Listed housebuilders disclose employ- housebuilders engage local planning ment policies and most companies authorities and local communities. All out for not doing regularly conduct employment satisfac- companies provide information about tion surveys. However, despite most how their activities benefit local commu- enough.” companies being heavily reliant on nities. In the main they also disclose the sub-contractors there is little or no detail value of the company’s planning about the extent to which companies use obligation (the developer’s legal obliga- umbrella companies or agency workers or tions and contributions entered into with how they ensure workers are legally planning authority to mitigate the self-employed and not employees. impacts of a development proposal). However, they provide little information to contextualise that information. A fair proportion also do not provide informa- tion about their approach to managing relationships with local planning authori- ties that go beyond boiler plate mentions of working with local communities. 4 NORTHERN LGPS HOUSEBUILDING REPORT | 2019 northernlgps.org THE HOUSE BUILDING SECTOR share, with winning the competition for land being Listed housebuilders (home construction sector) of primary importance. If customer satisfaction does play a less important role, then the industry could Company Index Market capitalisation be sheltered from criticism for the quality, size and BARRATT DEVELOPMENTS PLC FTSE 100 £5.59bn design of the new properties they build. These BELLWAY PLC FTSE MidCap £3.35bn criticisms could impact company brand and affect BERKELEY GROUP HOLDINGS PLC FTSE 100 £4.45bn long-term value creation. Overall industry levels of BOVIS HOMES GROUP PLC FTSE MidCap £1.32bn consumer satisfaction will also be important to COUNTRYSIDE PROPERTIES PLC FTSE MidCap £1.33bn ensuring there is not intervention by government. CREST NICHOLSON HOLDINGS PLC FTSE MidCap £0.92bn As a result of the Barker Review, the Home MCCARTHY & STONE PLC FTSE MidCap £0.69bn Builders Federation (HBF), the trade association for PERSIMMON PLC FTSE 100 £6.2bn housebuilders, has conducted an annual survey of REDROW PLC FTSE MidCap £1.92bn new homebuyers measuring satisfaction with the TAYLOR WIMPEY PLC FTSE 100 £5.42bn property they have recently bought. Total £31.19bn The majority of companies disclose the HBF star rating in their annual report. Most housebuild- ers also set targets for maintaining or improving their overall star ratings. However, there is often The quoted UK housebuilding industry is cyclical little information beyond the headline star rating in nature. Many of the large builders faced severe numbers on how well companies are viewed by financial difficultly during the financial crisis. customers and how this compares with the rest of Since then firms have recovered rapidly with the the industry. This potentially makes it difficult