Place-based impact investment initiative looks to drive levelling-up with LGPS billions

In the ‘white paper’ published today, key sectors identified as offering place-based impact include affordable housing, clean energy, infrastructure, small and medium-sized enterprise finance, and regeneration.

It suggests that these five sectors provide “stable, high, long-term returns and low volatility versus other mainstream classes”, and that investments in most of these are generally in real assets such as housing and infrastructure.

The report looked at published LGPS data to establish the size distribution of the UK’s 98 individual LGPS funds, finding a median value of £2.2bn, within a range stretching from £0.4bn at the small end to Greater Manchester’s more than £22bn fund. It also analysed annual reports and data on the underlying holdings of each fund.

The research found that at present, only 2.4 per cent of the total value of LGPS fund holdings are in the report’s five identified key sectors, of which only one per cent of total assets (£3.2bn) is clearly identifiable as directly invested in these sectors within the UK.

It noted that, to date, few pension funds demonstrate “intentionality” to invest with a local place-based lens. The reports’ authors identified only six LGPS funds out of a representative sample of 50 that had a stated intention to do so, and of these only Greater Manchester had an approved allocation to invest up to five per cent of its capital locally.

The report found that LGPS fund allocations to its five suggested sectors are generally relatively small in size, averaging £10m, thereby “busting the myth that pension funds can only make large allocations in the £50m to £100m range”.

At the same time, it cited a finding in the latest review by the Pensions and Investment Research Consultants (PIRC) that the allocation by local authority pension funds into alternative assets has doubled over the past decade to reach an average level of 11% of assets. These are investments falling outside the traditional asset classes commonly accessed by pension fund investors, such as stocks, bonds or cash investments.

Elsewhere, the report referred to the frustration of many UK fund managers it spoke to that “it is easier to raise capital from foreign pension funds than it is from UK pension funds”.

The report said: “It appears that the universal requirement to scaling up PBII is an increase in operational resource across the ecosystem to prepare, identify and do due diligence on PBII investments, including building expertise within local authority teams, LGPS investment teams and consultants. In order to meet this capacity challenge, we observed approaches we broadly classify as ‘building’ capabilities, ‘buying’ in the skills or ‘borrowing’ resources.”

Place-based inequalities are “more extreme” in the UK than in most comparable economies, the publication highlights, and it makes the case for place-based impact investing to play a key part in the levelling-up agenda.

In relation to this, it notes that seven out of the eight largest LGPS funds are located in the North and the Midlands.

Common reporting approach

The report lists key traits of PBII as: having a “clear intentionality to achieve a positive impact”, investing in ways that benefit specific local areas or regions, engaging and collaborating with stakeholders, and measuring and reporting impact.

It sets out the importance of promoting and adopting reporting, and through the white paper process, the authors have established a “PBII impact reporting framework” in partnership with a group of LGPS funds, fund managers and local authority representatives.

They add that there was “considerable interest in this initiative and already LGPS funds are requesting fund managers to report using the PBII Impact Reporting Framework”.

Significantly, this measurement is aligned to the metrics of the Sustainability Reporting Standard for Social Housing.

As a next step in relation to this aim, the project will look to pilot and further develop a common PBII impact measurement. It aims by October this year to secure commitments to report against the framework, with the first impact reports to be published in October 2022.

Commenting on the report publication, Sarah Forster, chief executive of The Good Economy, said: “Impact investing offers not only the capital, but also the methods and metrics which can be used to set common impact objectives and monitor and evaluate progress towards a levelled-up UK.”

Sarah Gordon, chief executive at the Impact Investing Institute, said: “When we speak about place-based impact investing we no longer only talk about the need to address long-standing inequalities and support more inclusive and sustainable development across the UK. We now have evidence that shows that there are real opportunities for investors to secure financial returns while doing so.”

Karen Shackleton, director at Pensions for Purpose, added: “We have seen a significant increase in interest in impact investment from the Local Government Pension Scheme over the past three years with a growing understanding that it is possible to deliver market rate, risk-adjusted returns alongside social impact. This research will allow funds to see what scope there is for such investment and should encourage them to consider introducing a more purposeful approach to their investment strategy.”