Several pension funds, including the Local Government Pension Scheme pool Border to Coast, have provided the majority of the funding for a new €1.6bn (£1.4bn) renewable energy investment fund launched by Macquarie Infrastructure and Real Assets.
The asset manager vastly exceeded its original £1bn target for the Macquarie Green Investment Group Renewable Energy Fund 2 after a surge of interest from institutional investors such as pension funds.
The Border to Coast Pension Partnership, one of the UK’s largest public sector pension pools in the UK, with assets of £46bn, was among the UK funds to invest in the project.
Climate change is one of the largest risks facing investors — and so investing in assets that recognise this risk and help play a part in the solution is a natural fit for us
Daniel Booth, Border to Coast
Daniel Booth, chief investment officer at Border to Coast, told Pensions Expert: “Infrastructure is a good investment opportunity providing stable and predictable cash flows, a good hedge against inflation, and gives our partner funds a more diversified investment portfolio.
“Our partner funds have a long investment horizon, and so identifying long-term risks is essential — which is why we embed environmental, social and governance issues into our investment decisions,” he continued.
“Climate change is one of the largest risks facing investors — and so investing in assets that recognise this risk and help play a part in the solution is a natural fit for us.”
Border to Coast, which recently became a signatory to the UN-supported Principles for Responsible Investment, has invested more than £260m in funds specialising in renewables across the UK, Europe, the US and Asia, “including segments solar, wind and energy storage, as well as £40m into our first co-investment: a straw-fired combined heat and power plant in Sleaford, Lincolnshire”, Booth said.
The Macquarie fund, with a 25-year horizon, will invest in a diversified portfolio of assets, including wind power assets around the world.
The fund has made two investments to date, having acquired a 10 per cent stake in the 576 MW Gwynt y Môr Offshore Wind Farm in the UK, and a 50 per cent stake in a 268 MW portfolio of operating residential rooftop solar projects across the US.
Leigh Harrison, head of MIRA, revealed that UK-based pension funds contributed around 30 per cent of the capital raised, and are among a group of investors “who are seeking long-term, steady, reliable income streams that help to match their long-dated liabilities”.
There are a number of other incentives, such as a wider trend, driven partly by low interest rates but boosted as well by the regulatory environment, for investment in alternatives like infrastructure and other illiquid asset classes, he noted.
The increased focus on climate change and on the post-Covid recovery is likewise leading to “a favourable investment environment”, Harrison said.
“Many [investors] are thinking about how they build back better and build back greener and facilitate a green recovery. Pension funds and institutional investors are looking to be part of that solution.”
Investment managers should not be greedy
Vassos Vassou, professional trustee at Dalriada, explained that there are a number of reasons why schemes would look to get involved with projects like that offered by Macquarie, with securing long-term cash flow being just one.
Conforming with increased regulatory pressure is another reason, he said. Investing in the type of vehicle Macquarie is offering is a good way for trustees to prove they are taking action in accordance with their statement of investment principles.
Border to Coast invests £370m in private equity
Border to Coast has invested £370m in five new private equity funds on behalf of its Local Government Pension Scheme partners.
Eight of its 11 LGPS funds together committed £485m in April last year, 75 per cent of which has now been allocated.
Some $94m (£68m) has been placed in the KKR Asian Fund IV, an Asia-focused buyout fund targeting upper mid-market and large-cap equities.
Another $100m has been allocated to the US-based Thomas Bravo Fund XIV, with a further €75m in Europe-based healthcare, technology and financial services-focused Nordic Capital Fund X.
The other two investments are $125m in the AlpInvest Co-investment Fund VIII, a global co-investment strategy focused on buyout and growth capital transactions; and £50m in the UK-based Endless Fund V, which focuses on turnaround or distressed companies in the lower mid-market.
“There are good investment reasons to do it, but there are also good moral reasons to do it. And it’s those sorts of newer pressures on trustees that I think is probably getting Macquarie so much interest in its new fund,” Vassou noted.
However, he argued that trustees are heavily reliant on their investment consultants to determine whether their investments really are as green as they say they are.
In turn, the Competition and Markets Authority is pressuring trustees to review the performance of their investment consultants, and assessing their performance against the performance of the green funds they recommend may be one way to comply with the requirement.
Investment managers likewise have a responsibility not to “fleece” trustees and schemes with fees for green funds, Vassou continued.
Where the existence and claimed quality of an ESG fund is used to justify charging higher fees than a non-ESG fund, he questioned whether the investment managers can really be said to be “living their values”.
He suggested it would be better if fee structures were reversed, with higher fees being charged for non-ESG funds so that they can be lowered for ESG offerings.
“I do think there’s a huge responsibility here on investment managers and how they behave, because there’s a huge opportunity for them to behave very badly and go seeking lots of money,” Vassou said.
“That’s what greenwashing is about as well. That sort of element of it, greed in that industry, needs to be watched and carefully monitored.”
