A new report puts the case for impact investment opportunities that connect private capital to under-privileged areas in the UK. Andrew Holt looks at the findings.
A new initiative, the Place-Based Impact Investing Project led by social adviser The Good Economy, the Impact Investing Institute and Pensions for Purpose, has set out a strong case for institutional investors to adopt a “place-based lens” impact investing approach.
In a new report, Scaling up institutional investment for place-based impact, the project sets out to show the opportunities for investors to secure financial returns while addressing place-based inequalities and support more inclusive and sustainable development across the UK.
While the initial phase of the project is focused on the role of the £326bn managed by the local government pension scheme (LGPS), the project’s partners believe that place-based impact investing has the potential to become a “new paradigm” for all kinds of investors.
The project is now looking to harness the interest generated among local government pension schemes, local authorities, fund managers, asset owners, consultants and other place-based stakeholders by inviting them to participate in a second phase. The report explores how to scale-up institutional capital into local and regional opportunities in key sectors, including affordable housing, clean energy, infrastructure, small and medium-sized enterprises finance and regeneration.
Sarah Gordon, chief executive of the Impact Investing Institute, noted: “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.
“Connecting private capital to deliver positive impact, in the places that most need it, is not only crucial to building back better after the coronavirus pandemic, it also has the potential to unlock significant investment in local businesses, quality jobs, affordable homes and town centre regeneration that can bring us one step closer to a truly sustainable economy,” she added.
The report’s main findings are threefold: one, assets identified as place-based investments already exist in portfolios of local government pension schemes and can provide stable, risk-adjusted returns and low volatility.
Two, currently place-based impact investment is limited, with local government pensions schemes investing around 1% of their portfolio in ways that could directly support local and regional economic development and positive place-based impact creation.
Three, there is a legacy of local investing by local government pension funds, but, if 5% of their funds were allocated to local investment this would unlock £16bn of capital focused on delivering financial returns and responding to the needs and opportunities of specific places.
The report also makes the intriguing point that place-based inequalities are more extreme in the UK than in most comparable economies – and have existed for generations. In addition, the coronavirus pandemic, coupled with Brexit, have moved this reality to the centre stage of the public debate.
Methods and metrics
With the UK government’s “Levelling Up” agenda expected to require £1trn of spending during the next 10 years, the report sets out a clear rationale and path for how private capital could be mobilised alongside public investment.
Sarah Forster, chief executive of The Good Economy, commented: “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.”
In this way, Karen Shackleton, director of Pensions for Purpose, noted there has been a significant increase in the interest of impact investment from the LGPS in recent 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,” Shackleton said.
The research, therefore, aims to build the evidence and narrative for investors to identify opportunities to achieve market rate, risk-adjusted returns in key sectors identified as drivers of inclusive and sustainable development between and within regions of the UK.
And George Graham, director of the South Yorkshire Pensions Authority, observed that local authority funds have a unique connection among investors with places where funds have made significant contributions while achieving the returns required to meet their liabilities. “As return becomes more difficult to achieve and, perhaps more uncertain, looking closer to home can provide opportunities to generate the returns we need to meet our liabilities while working to improve the places where our scheme members live and work,” said Graham.