Pension funds should take the initiative if they are to make a succes of placed-based impact investing, writes Karen Shackleton.
The Good Economy, Pensions for Purpose and the UK’s Impact Investing Institute published a white paper in May, “Scaling up institutional investment for place-based impact”, to analyse the level of LGPS investment in place-based, or local, impact investing.
These are investments that have a dual goal of delivering market rate, risk-adjusted returns together with a positive impact on the local environment or society through a place-based opportunity.
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One of the interesting insights from the report was that only six LGPS funds have so far acted intentionally to invest in place-based impact funds, although a further 19 have exposure to these types of investments without that having been an intentional impact decision.
By contrast, there has been a significant growth in the number of funds on offer: over the past three years the number of private markets funds has increased 16% and listed funds have more than doubled in number (the report contains a full list of these funds.)
This coincides with a survey by the Institute of Directors in which 62% of company directors felt their organisation’s goals should not be confined to shareholder profits. Further questions reveal that 90% agree that companies should also be guided by a purpose, mission or vision.
Many LGPS funds are discussing their investment beliefs and introducing a third dimension to their investment strategies, i.e., risk, return … and purpose. They increasingly want to understand the environmental and, or, social impact being achieved in their underlying investments.
Authenticity
Place-based impact investing (identified in the white paper as housing, SME finance, clean energy, infrastructure and regeneration) can align to these investment beliefs. Yet with media articles warning against the dangers of green- or impact-washing, how can pension funds identify authentic place-based impact opportunities, and measure and monitor the impact being achieved over time?
The starting point is to receive training, either a holistic introduction to impact investing or a deep dive into an asset class such as residential property, which explores how positive impact can be achieved. It is worth hearing from several asset managers offering place-based funds.
In housing, some managers offer niche, high impact funds focusing on a particular sector such as vulnerable women. Others are more diversified with exposure to a wider range of sectors, such as care homes, key worker homes, disabled living and refugee housing. What can be helpful is to consider how closely the impact of a manager’s fund is aligned to the pension fund’s ESG investment beliefs.
It can also be helpful to think in advance as to what “place-based” means to the committee. The white paper says for some LGPS funds, “place-based” means the local authority in which they work, for others it means their region in the country; for some it means a national focus and for others a global focus (e.g. emerging economies).
Framework
The white paper suggests a framework for measuring and monitoring place-based investments for the LGPS, covering:
Step 1: Specify the overall impact goal and narrative, including the fund’s target geography and impact goals. This could be embedded into the pension fund’s investment strategy statement, if desired.
Step 2: Define clear place-based impact objectives. This can be particularly important when investments are being considered in the pension fund’s own local authority area. It helps to clarify what is expected and how that aligns with the local authority’s own (but distinct) priorities. Clear objectives also set expectations for asset managers so that both sides have a good understanding of what impact success looks like. For example, housing objectives might be, “To increase the supply of safe, decent affordable housing in the Target Geography.”
Step 3: Map out a “theory of change”. This links the activities of the asset manager with the outcomes desired by the pension fund. It allows the pension fund (a) to assess whether a manager’s fund is aligned to their goals or not and (b) shows how they will work together towards the desired outcomes. The white paper highlights several examples of theories of change in different place-based impact investment sectors.
Step 4: Determine the core metrics. This is a key step because it allows the pension fund to measure and assess impact success. At this point, it can be helpful to think holistically and consider metrics that can be applied across many asset classes, such as alignment to the Sustainable Development Goals (SDGs) or carbon metrics, because this will allow for a degree of comparability across different impact investments.
Step 5: Impact management (setting out reporting requirements). Having defined clear metrics, the pension fund can now have a dialogue with an impact manager around reporting requirements. Again, consistency is helpful because impact data can then be aggregated and shared in the pension fund’s annual report. Questions such as, “where have we invested?”, “what are we invested in?” and “how is the pension fund supporting its target geography?” can provide LGPS funds with a useful summary of impact being achieved across the wider portfolio, which can then be reported to members.
Alignment
If a pension fund takes the initiative from the start, defining its impact goals and success measures, then place-based impact investing can be an investment that not only offers a market-rate, risk-adjusted return but also represents an exciting impact opportunity which is aligned with the fund’s investment beliefs, evidenced over time in a consistent way across the whole portfolio.
Karen Shackleton is director of Pensions for Purpose.
Photo by Ray Harrington on Unsplash
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