A UK-government backed white paper has called on the £326bn Local Government Pension Scheme (LGPS) funds to allocate 5% to local investing after finding only a small fraction of UK pension money is invested directly in driving UK sustainable development.
The white paper, Scaling Up Institutional Investment For Place-Based Impact, written by The Good Economy, Impact Investing Institute and Pensions for Purpose, says place-based inequalities are more extreme in the UK than most other OECD countries – and that the combination of Covid-19 and Brexit has placed the issue centre stage in public debate.
The launch of the paper, which is supported by the UK Government, City of London Corporate and Big Society Capital, is kicking off the Place-Based Impact Investing Project to move pension funds – the LGPS funds in particular – to look “closer to home” with their investments, to help drive sustainable, economic recovery and growth.
The UK’s 98 LGPS funds “make up one of the largest pools of institutional capital that also has connections with place-based communities in all areas of the UK”, but only six such funds have a stated intention to make place-based investments, says the white paper.
Of these, only Greater Manchester has an approved allocation to invest up to 5% of its capital locally. The white paper finds that if all LGPS funds allocated 5% to local investing, it would unlock £16bn for local investing and more than match UK government initiatives on local investing such as the £4.8bn Levelling Up Fund.
The paper sets out a framework for place-based investing focusing on five key sectors including clean energy and energy efficiency; social and affordable housing and infrastructure.
It found LGPS funds’ exposure to these key sectors amounts to only 2.4% of their total assets, of which only 1% of total assets (£3.2bn) is clearly identifiable as directly invested in these sectors within the UK.
This is despite these sectors aligning with the funds’ needs for stable, long-term returns and low volatility, the research says. However, it highlights the universe of assets in these sectors is comparatively small and often in the private markets, “suggesting manager selection and deeper understanding of the risks is demanded of the LGPS and other interested institutional investors”.
Many UK fund managers interviewed for the report, and operating within key place-based sectors, expressed “major frustration at how it is easier to raise capital from foreign pension funds than UK pension funds, including LGPS funds”.
The research also maps out an impact measurement and management framework for place-based investing and includes case-studies of place-based investment strategies.
Going forward, the Good Economy plans to work with supportive LGPS funds and fund managers as part of the Place-Based Impact Investing Project.
“If we manage to accomplish this, the UK will be creating bridges between London and the rest of the country, and bridges between financial capital and the real economy,” concludes the report.