Lancashire hails portfolio's positive impact on local area

Social impact investments, which target healthy returns while delivering positive social outcomes, often in their local community, are a hot topic among trustees, but so far few schemes have taken the plunge.

Lack of regulatory clarity and difficulty accessing opportunities are two of the hurdles trustees face, a white paper published by the Society of Professional Pensions on Tuesday said. “Without a clear legal framework, trustees remain nervous about social impact investments,” the report said, recommending that the government and Pensions Regulator do more to clarify the rules.

Social impact investments sit within the responsible investment universe, but go beyond simply avoiding bad outcomes – such as negative screening – to produce social benefits, while delivering strong returns.

There are some really interesting opportunities that can be achieved with the pools on social impact investing

Karen Shackleton, Pensions for Purpose

Since 2013, LCPF has invested £100m in Preston and a further £100m in the rest of the county, spearheading an economic renaissance in the community. Investments such as refurbishing Preston’s Park Hotel, investing in Blackburn’s Cathedral Quarter, and redeveloping a former furniture factory in Lancaster helped reduce unemployment from 6.5 per cent in 2014 to 3.1 per cent in 2017 (compared to UK average of 4.6 per cent).

Richard Tomlinson, real estate investment director at the Local Pensions Partnership, which administers LCPF, says: “It is fantastic to see how these investments are opening up housing, business and employment opportunities within the county.”

He continues: “We know that the members of our clients’ pension funds are keen to see their funds investing back into their communities. Where these investments meet the fund’s return benchmarks and benefit the local area at the same time, this is a win-win scenario which should be supported.”

Frances Jones, associate director at the Centre for Local Economic Strategies, which helped spearhead Preston’s wider regeneration strategy, says trustees have it within their power to benefit their local communities through social impact investing.

“Local authority pension funds are the stewards of local wealth built in their place, investment decisions should reflect those local roots and the values of the public institutions their members serve,” she says.

South Yorkshire Pension Authority also established an £80m local property fund this year. Other pension fund trustees – at LGPSs and beyond – are likely to follow suit.

Returns, not philanthropy

Social impact investment has climbed the agenda of institutional investors in recent months. But how exactly is it defined?

Nick Clapp, head of business development at Kempen Capital Management, says investors and trustees often mistakenly confuse social impact investing with purely ethical investments that forego healthy returns.

“Impact investing does not mean that you are reducing the investment opportunities open to you,” he says. “Our view is that if you are going down the route of trying to pursue something that does good but sacrifices returns, you are straying into philanthropy, which obviously from a legal perspective is not within trustees’ remit to do.”

Mr Clapp notes that interest in social impact investment is gaining ground fast among investors who want to align their investments with their corporate values.

In the context of rising demand, asset managers should be creating opportunities for trustees to act, Mr Clapp says. “Kempen’s challenge is how can you take that belief of the trustees – that they want to do more than just doing no harm, they want to do some good – and deploy that in the investment market.”

The next 12 months will see a “flourishing” of investment vehicles in the social impact space, Mr Clapp says.

How can it be done?

One option available to trustees is to invest in one of the growing number of social impact funds. What they choose depends on their particular objectives, but there are a rising number that offer decent returns.

Resonance, which has built a successful property fund for institutional investors, targets the alleviation of homelessness while delivering 6 per cent in returns.

“From an investment perspective, this is a really good defensive, long-income investment for a pension fund, with good inflation correlation both in terms of the yield and the underlying asset value. It’s a really good diversifier,” says Simon Chisholm, CIO at Resonance.

The fund invests in housing stock which is then rented to a homelessness charity, primarily St Mungo's, which helps get people off the streets or out of temporary accommodation and BnBs. With 80,000 people in the UK in ‘half-way houses’, struggling to find employment after homelessness, Mr Chisholm estimates this to be a £20bn market.

But homelessness reduction is just one social impact available to trustees. Other options include fighting poverty, providing clean water, promoting healthy lifestyles or boosting a deprived local economy, as in Lancashire.

Centralised capital, local impact

Until now, pension funds that invest heavily in their local area have left some analysts feeling uneasy. “Local investment starts to raise some alarm bells in my head because of the specific risks associated,” says Karen Shackleton, director of Pensions for Purpose and a senior adviser at MJ Hudson Allenbridge, as any fall in the local economy could lead to a double shock – hitting the community first and invested pension fund savings second.

But local authority pension pooling promises to bypass this obstacle, with greater scale enabling multiple local investments that diversify the overall portfolio, reducing risk.

“There are some really interesting opportunities that can be achieved with the pools on social impact investing,” says Ms Shackleton. 

Using Border 2 Coast as an example, Ms Shackleton says the fund could establish a social impact fund that takes money from, and invests in, East Riding, Warwickshire, and Surrey (etc.), achieving diversified returns plus local impacts.

“Each authority gets the diversified return on the pool's impact fund, but their impact being achieved on their capital is in their local area, so you are segregating out the impact from the return. As an investor, you’ve got multiple areas that you're exposed to, so the investment-specific risk goes away,” says Ms Shackleton. 

Through diversifying their returns, then, the pools can achieve local objectives through centralised capital.

What lies ahead

So what’s next? Mr Clapp says that, in the near future, social impact investment will be standard practice for institutional investors. “I’m absolutely delighted and gobsmacked at the speed this has changed. Twelve months ago we were not having these conversations, yet I am sitting down with trustees and having these conversations regularly at the moment.”

Disagreeing with the SPP white paper, he says it’s not just up to TPR to push the issue, and everyone in the industry – from consultants and asset managers to trustees and advisers – should get clued up. 

Mr Clapp adds: “In terms of the direction of travel, social impact investment will just be how to do things in two or three years time.”