New impact investment project encourages public pension schemes to invest “closer to home”.
UK public pension schemes are overlooking opportunities to combine strong financial returns with meaningful social impact in some of the country’s more unequal regions, according to a white paper from leading impact investment think-tanks.
The paper provides practical guidance on a place-based impact investing approach, designed to support levelling up and building back better in ‘left behind’ regions, many of which have suffered disproportionately in the wake of the Covid-19 pandemic. It also details the aims of the Place-Based Impact Investing Project, a new initiative backed by the Good Economy, the Impact Investing Institute and Pensions for Purpose.
“We see institutional capital as a much-needed third engine [alongside public and social investment] to help us build back better. A place-based approach means ensuring investment meets the needs and priorities of communities. Most investors are used to sitting in London and thinking globally; we’re thinking locally,” said report co-author Mark Hepworth, Director of Research and Policy at the Good Economy, speaking at a webinar yesterday to promote the initiative.
The paper calls for member funds of the Local Government Pension Scheme to increase their collective impact-based investment in local and regional development from 1% to 5% of assets under management, equivalent to approximately £16 billion. The authors argue that this shift would serve as a catalyst for further investment from the UK’s £2.6 trillion pensions industry.
The place-based impact investing approach outlined in the report prioritises five sectors – housing, regeneration, infrastructure, clean energy, SME finance – noting that investment in these can have strong positive impacts on local economies, while also delivering superior and counter-cyclical returns compared with listed securities.
“Pension funds and other institutional investors allocate to the global capital markets with no consideration as to whether there are investment opportunities closer to home that would deliver the same returns and diversification. We want to change that investment paradigm,” said Sarah Forster, CEO of the Good Economy.
Citing the estimated cost of the UK government’s levelling up agenda at £1 trillion over the next decade, as per HM Treasury’s recent Levelling Up Fund Prospectus, the report argues that private investment will be needed to supplement public funds.
Research conducted for the report flags several barriers to an increase in place-based impact investing by local government pension schemes, including fund selection norms, access to expertise, potential conflicts of interest, and a prioritisation of environmental rather than social factors in investment strategies. The report makes proposals to overcome these barriers, including improved information flows and the greater use of impact measurement metrics to enhance transparency across the value chain.
Project members said metrics for monitoring placed-based impact investment projects should align with existing principles-led frameworks including TOMS, widely used to set objectives in UK local government.