The ESG Interview: Pension Schemes can be Local Heroes

Structural barriers and trustee perceptions must be overcome to attract pension assets to place-based impact investments, says Karen Shackleton, Founder of Pensions for Purpose.

Prime Minister Boris Johnson conceded that the North/South wealth divide in the UK could no longer continue if the country was to ‘build back better’ after the Covid-19 pandemic.

Announcing plans for post-pandemic recovery this March, Johnson said: “While the UK has continued to punch well above its weight as the fifth biggest economy in the world, that punching – and with it jobs and opportunities – have been concentrated in London and the South East. Talent and resources have been sucked to the south so that for many people and places in Britain and Northern Ireland our economic model has just stopped working.”

As part of its solution to end wealth disparity in the UK, the Conservative government pledged £4.2 billion to ‘levelling up’, including commitments to “creating the conditions for long-term growth and productivity; invest in infrastructure and connectivity; and improve the quality of life in communities through cutting crime and regenerating towns and high streets”.

But according to a white paper by social advisory firm The Good Economy, the cost of levelling up the UK economy will exceed £1 trillion over the next 10 years, meaning public investment must be matched by private investment.

Karen Shackleton, founder of Pensions for Purpose, which connects asset managers, asset owners and consultants to encourage the flow of capital towards impact investments, says pension funds will be critical in driving this effort through place-based impact investing (PBII).

“Place-based impact investing is being pushed by the government as part of the levelling up agenda. There is a recognition of the potential for private capital to be applied, earning a reasonable return and still having a dramatic impact.”

Low levels of investment

The Good Economy defines PBII as investments made with “the intention to yield appropriate risk-adjusted financial returns as well as positive local impact, with a focus on addressing the needs of specific places to enhance local economic resilience, prosperity and sustainable development”.

In other words, directing money towards local projects with a goal of improving life for local communities while also making money for investors.

Practitioners include the £8.2 billion South Yorkshire Pension Authority, which invests across all the key PBII sectors including SME finance, affordable housing and renewable energy. In 2019, the scheme appointed property developer and investor CBRE to manage an £80 million allocation and expects to make loans in the range of £10-15 million with a current return across the portfolio of 6.75%.

In 2020, The London Fund, a collaboration between two Local Government Pension Scheme (LGPS) investment pools, was created to invest in three of the PBII pillars – housing, infrastructure and SME finance. The fund’s target return is three percentage points above consumer price inflation and will aim to raise up to £500 million “over several years”.

However, research by The Good Economy has found “a very low level of investing into key PBII sectors”. Only 2.4% of the total value of £320 billion LGPS funds are in these key sectors, of which only 1% of total assets is “clearly identifiable as directly invested in these sectors within the UK”.

Shackleton says more must be done to convince pension funds to commit to PBII, and not just those in the local authority sector.

“The LGPS is a bit further ahead in terms of PBII as their members experience a lot of the social challenges first-hand. We have had discussions on our platforms where some of the corporate pension funds have said they don’t see this as a good investment. They are focusing on the financials, while impact is a secondary issue in a way it isn’t for local authorities.”

Bank of England support

Shackleton has set a personal goal to get 5% of all UK pension assets invested in impact assets before she retires in seven to eight years’ time.

And while this might seem ambitious, if Shackleton were able to get all LGPS funds to allocate 5% to local investing, it would unlock £16 billion, far outstripping the figure promised by the government.

Shackleton would also like to see more of the UK’s £500 billion defined contribution (DC) pension scheme assets allocated to PBII. This, she concedes, comes with its own set of challenges.

“Many DC funds, which is the growth sector, are limited by their [0.75%] fee cap and daily liquidity requirements. A lot of the social investments are not in liquid instruments,” she says.

Fortunately for PBII proponents, this September the Bank of England (BoE) indicated that there will be more support for DC investment in illiquid assets.

In its Roadmap for Increasing Productive Working Finance, the BoE  states that “a broader range of DC schemes can find approaches that enable them to invest in less liquid assets as part of a diversified portfolio, while also meeting liquidity needs of DC scheme members”, concluding that without greater investment in less liquid assets “the opportunity of securing greater potential long-term value for pension scheme members in their retirement will be harder to achieve”.

But even with the heft of the BofE behind her, Shackelton says convincing asset owners of the benefits of PBII is a challenge.

Shackleton says: “There is the need for more knowledge among the trustees about the benefits of PBII. We need to reach as many pension funds as possible and we are working on that through our knowledge centre and thought leadership.”

There are also issues around fiduciary duty. The Good Economy says LGPS managers are “wary of being accused of succumbing to political pressures that undermine their fiduciary responsibility”, when considering PBII.

Shackleton says: “There is less understanding about how social impact funds can meet their financial goals, which makes a less compelling investment thesis than some of those focused on managing climate risk.”

She adds: “There is a lack of consistency in how managers report social impact, but that will evolve and there will be more standardisation.”

Broadening horizons

Shackleton would also like to see more knowledge on PBII from professional advisers. She points to some consultants’ reliance on larger asset managers, rather than considering the PBII strategies offered by smaller, specialist managers.

“The consultants themselves admit they are on learning curve. They have set up a working group where they talk about sustainability and impact, which is a good thing because it means consistency in messaging at a strategic level. But I do have concerns that the larger firms with big marketing budgets are getting all the attention and some of the smaller niche boutique managers – that have been doing this for a long time and are exerts in delivering impact – are getting left behind.”

Shackelton says The Good Economy is looking at how to broaden the universe of managers put in front of pension funds to give trustees a full picture of the PBII market.

PBII has the potential to be a win-win: regenerated local economies and thriving communities that return wealth to investors. However, advocates will have to maintain the current momentum if they are to continue to build back better by 2030.

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