Editor's blog: There has been a flurry of stories this month on local authority pension funds allocating to investments that target a positive social or environmental impact, giving a shot in the arm for proponents of activist investment.
But at all points the pension funds involved have been careful to stress, as per their fiduciary duty, that the return drivers come before any starry-eyed bid to make the world a better place.
We reported on West Midlands Pension Fund setting aside £40m for small and medium-sized enterprises in the Birmingham area.
“In terms of social impact, most immediate and important would be generating and hopefully sustaining employment in the West Midlands,” said Antony Ellis, communications officer at the fund, while stressing the investment is expected to hit the fund's target annual return of 6.9 per cent.
We then reported on Strathclyde Pension Fund making four allocations to renewable energy and drug development companies as part of its New Opportunities Portfolio, which has a preference for investments with a positive impact.
But pension schemes are taking on risks that they have not taken on previously, with managers of whom they often have no prior knowledge.
But at all points the pension funds involved have been careful to stress, as per their fiduciary duty, that the return drivers come before any starry-eyed bid to make the world a better place.
We reported on West Midlands Pension Fund setting aside £40m for small and medium-sized enterprises in the Birmingham area.
“In terms of social impact, most immediate and important would be generating and hopefully sustaining employment in the West Midlands,” said Antony Ellis, communications officer at the fund, while stressing the investment is expected to hit the fund's target annual return of 6.9 per cent.
We then reported on Strathclyde Pension Fund making four allocations to renewable energy and drug development companies as part of its New Opportunities Portfolio, which has a preference for investments with a positive impact.
This week, five local authority funds under the banner Investing4Growth announced a swathe of investments seeking to make a positive economic impact.
But pension schemes are taking on risks that they have not taken on previously, with managers of whom they often have no prior knowledge. As Investing4Growth's chair – and chair of the Greater Manchester Pension Fund – Kieran Quinn put it:
Source: Investing4Growth press statement
Some of these risks can be tricky. For Strathclyde's £10m investment in energy company Albion Community Power, the fund acknowledged four such risks:
Construction risk: this will vary depending on the technology used, from a small hydro scheme to a wind turbine.
Operational risk: these are "transferred out by way of contract", according to the scheme's investment notes.
Pricing risk: the risk of misjudging the income, but projections assume a base-case scenario of pricing via the grid rather than local buyers.
Market risk: exiting the investment could be tricky, but "assets could be sold piecemeal if necessary".
I put it to Stratchclyde's chair Richard McIndoe that the projected internal rates of return across these four alternative allocations were quite robust given these risks.
His response: "Our diligence gives us confidence that the IRR estimates have been constructed on the basis of facts, strong evidence and solid research and that the risks have been properly evaluated and taken into account.
"Wherever possible risks are mitigated. Any assumptions within the IRRs are usually fairly conservative. But we know these aren’t guaranteed returns."
There is no doubt that these innovators are helping to create the market they want to invest in, which should be applauded. And investors' hands are tied unless we see a groundbreaking shift in the Law Commission's verdict on schemes' fiduciary duty as investment intermediaries, expected shortly.
But if some of these investments do not perform as predicted, some may wonder whether it would have been better to admit from the start that the social and environmental impact considerations were just as, if not more, important than hitting an exact return target year-on-year.
