Mark Hepworth argues that investing in local places can pay off for LGPS funds.
Few of us would disagree with the sentiment of levelling up and build back better. The global pandemic and Brexit have combined to move place-based inequalities to centre stage in public debate.
The need for more public investment is undeniable. But to get anywhere close to what’s required for a so-called levelling up (a cool £1trn according to the UK 2070 Commission, led by Sir Bob Kerslake), we need a doubling up of public and private investment.
16 November 2021
London Stock Exchange or ONLINE
Room 151’s LGPS Investment Forum
Our annual gathering of administering authorities of the LGPS, their investment pools and advisers.
Qualifying local government investment officers can register here.
The perennial question is: How?
This is the basis of a new collaborative project that The Good Economy, The Impact Investing Institute and Pensions for Purpose are launching this week, to mobilise local government pension scheme (LGPS) and wider pension fund investment in place-based sectors across the UK.
We’ve taken the insight, input and knowledge of around 80 market participants, from local authorities, to LGPS funds, fund managers and pensions consultants, to lay the foundations of a stakeholder model with a true alignment of interests, objectives and values.
This week’s resulting “white paper“, launched on Wednesday, aims to offer a clear set of directions for investors to engage in place-based impact investing (PBII).
What is PBII ?
So, what is PBII? PBII is an opportunity to match the investment potential for pension funds in a coordinated way to drive economic growth in local places, bringing together multiple stakeholders in joined-up investment strategies that benefit local people and places through both their direct and multiplier effects.
It’s about making investments with the intention of yielding suitable long-term, risk-adjusted financial returns as well as positive local impact, addressing the needs of specific places to enhance local economic resilience, prosperity and sustainable development.
This puts place as the intersection where impact and fiduciary duty meet; where the worlds of institutional investment and economic development collide; where inclusive growth aligns with sustainable development.
While LGPS funds are the empirical focus of our project and a natural starting point to pioneer PBII in the UK, they can also show the way forward for the multi-trillion pound pensions industry.
Of course, increasing LGPS allocations in local places isn’t a new concept. LGPS funds already have a legacy of local investing and driving positive impact (we’d expect to see some feature in Room 151’s Impact Awards, showcasing the difference local government finance teams are making for communities and for the environment).
Yet of 50 LGPS funds we looked at, we could identify just six that have a stated intention to make place-based investments: Cambridgeshire, Clwyd, Greater Manchester, Strathclyde, Tyne and Wear and West Midlands.
And of these, only Greater Manchester has an approved allocation to invest up to 5% of its capital locally.
And yet a 5% commitment across the LGPS could release £16bn of investment. Opportunity knocks.
Why LGPS?
LGPS is one of the largest pools of institutional capital that is directly connected with place-based communities in all areas of the country.
Decentralised geography and local investment decision-making powers make it a natural focus for place-based investment.
Ideally, PBII would generate a virtuous circle of good pension fund returns and strong local multiplier effects that bring inclusive prosperity and sustainability in the long run.
Stronger local economies would also result in greater financial stability for the local authority members of the pension funds.
PBII also extends the scope of the LGPS sustainability agenda from the ‘E’ in ESG to the ‘S’, and from the environmental SDGs to a wider set of Sustainable Development Goals (SDGs) covering sustainable and inclusive economic development and decent jobs.
But we recognise LGPS funds have responsibilities first and foremost to their members. So it’s important to say that place-based sectors are also very well-suited to LGPS investment on a purely fiduciary basis.
We know that institutional investors, including LGPS, turn to the global capital markets by default – but we can show allocations closer to home can deliver comparable returns and diversification, while benefiting local communities.
Investments in key UK PBII sectors provide stable, high, long-term returns and low volatility versus other mainstream asset classes. PBII is typically focused on alternative asset classes, which have themselves doubled over the last decade across LGPS allocations.
They are generally in real assets, such as housing and infrastructure, so can also provide income streams and a number of investment-grade opportunities. As they tend to be illiquid, they often command higher returns.
They are also often underpinned by revenue streams which are either government guaranteed or (through social transfer payments) countercyclical, with underlying cashflows that are often inflation-linked.
16 November 2021
London Stock Exchange or ONLINE
Room 151’s LGPS Investment Forum
Our annual gathering of administering authorities of the LGPS, their investment pools and advisers.
Qualifying local government investment officers can register here.
What needs to happen
With all that in mind, our focus at this point is to raise awareness of the PBII opportunity, and to continue the conversation with pension funds, fund managers and consultants, along with the stakeholders in the places we are talking about.
We think funds can overcome LGPS conflict of interest concerns about local investing, by establishing governance and operational arrangements that mitigate these risks and have succeeded in Greater Manchester and South Yorkshire.
We need to facilitate and support an increase in capacity and expertise across the LGPS for place-based investment, through an approach of building, buying and borrowing skills. We recognise the need to scale up to make this work for fund managers, and work in a coordinated way that will address economic plans and drive sustainable growth in local places. There needs to be a way to connect investors with PBII opportunities. We need to scale up institutional grade PBII investment products and funds.
Finally, there must be a framework within which we can see the impact, and measure it. That requires transparency and accountability. And we need a model that allows for equitable distribution of impact investing.
We’re at the start line with place-based impact investing. But we believe, it could deliver for LGPS, stakeholders in place, and importantly, people up and down the country.
Join us for the PBII white paper launch webinar on Wednesday 26 May at 4pm, with a presentation and discussion of the project’s findings, recommendations and next steps. Register here.
Mark Hepworth is co-founder of The Good Economy.
————————————-
FREE monthly newsletters
Subscribe to Room151 Newsletters
Room151 Linkedin Community
Join here
Monthly Online Treasury Briefing
Sign up here with a .gov.uk email address
Room151 Webinars
Visit the Room151 channel
