Analysis: Pension scheme trustees are not – and should not be – philanthropists. But as long as there is a financial return involved they can help address societal challenges.
Is there an appetite among schemes to invest in businesses that create good outcomes for the environment and society? And if so, how can that positive impact be measured?
You can be financially driven, and still be very thoughtful about impact, and still be very true to fiduciary duty
Elizabeth Corley, Implementation Taskforce for Growing a Culture of Social Impact Investing
The 82 managers offering impact funds that the Global Impact Investing Network has been able to track over five years have seen asset growth of 13 per cent a year, according to the group's 2018 Annual Impact Investor Survey
Among pensions and insurance impact investors, fund managers said theme or sector-focused investment products saw the most increased interest, with geographically focused and long-term products next most popular.
Caroline Escott, policy lead for investment and stewardship at the Pensions and Lifetime Savings Association, says impact investing “is something that a lot of schemes talk to us about”.
Speaking in a panel session at the PLSA’s recent investment conference, she says: “We think that there is a definite merit in trying to encourage schemes to invest in a way which has a positive impact on the world into which beneficiaries are going to retire.”
Measuring impact
Richard Sherry, manager of the M&G Impact Financing Fund, says impact investing "describes investments made in companies, projects or organisations that intentionally seek a measurable environmental or social benefit alongside a financial return”.
He adds: “It is this dual objective that sets impact investing apart from philanthropy and charities, that don’t seek a financial return, and other sustainable or ESG investment approaches, that don’t generally target direct environmental or social benefits”.
Mr Sherry highlights that the role of a manager in this space includes measuring the impact an investment has made and reporting these metrics to pension funds. This could be patients successfully treated, the number of social homes built, new jobs created, carbon emissions avoided or renewable energy generated.
In March 2018, the government commissioned an industry taskforce on social impact investment. During the recent PLSA panel session, Elizabeth Corley, chair of the Implementation Taskforce for Growing a Culture of Social Impact Investing in the UK, says: “The key point is to remember it’s about the intention to have an impact at the beginning.”
She adds: “It’s very easy to mine portfolios ex-post – in other words at the end of it – and say, ‘Ah yes, I meant to have that effect’. But the key thing about impact is: did you mean to have that effect at the beginning?”
Asset managers need to decide how they are going to measure that impact and then, “if you’re willing to measure it, will you be accountable for it as an asset manager?” she says.
Make it mainstream
According to Ms Corley, who is also senior adviser to Allianz Global Investors, many schemes are already doing impact investing, “they just are not doing it consciously”.
“You can be financially driven, and still be very thoughtful about impact, and still be very true to fiduciary duty,” she adds.
Source: Social Impact Investment and Pensions Survey commissioned by government and carried out in 2017 by Allenbridge, now MJ Hudson Allenbridge.
The HSBC UK Pension Scheme, for example, holds investments in a range of assets providing good risk-adjusted returns while having a social impact, according to the fund’s chief investment officer Mark Thompson.
Within the scheme’s core credit portfolios the fund invests in bonds for affordable housing. Furthermore, “in our commercial ground rent portfolio, we’ve done deals that have allowed companies to build more mental hospitals, more care homes”, Mr Thompson says.
These are just a few examples of the scheme’s investments that have a social impact, but Mr Thompson emphasises that a lot of these asset classes were chosen “because they were giving us the risk-adjusted returns that we needed”.
“If you’re a trustee of a pension scheme you’re there to deliver a pension, not to give money away,” he highlights.
However, he adds that there is a need to widen the definition of social impact, stressing that it should be made “mainstream” more quickly.
Impact investing popular among LGPS
Impact investing considerations differ depending on whether the scheme is defined benefit or defined contribution.
“Trustees of DC schemes may well find that members have some appetite for impact investing on a member select basis. If this is something DC members want to choose themselves and particularly if this can be part of increasing member engagement, then clearly that will be very attractive,” says Ralph McClelland, partner at law firm Sackers.
However, anecdotally, he says member take-up for this type of option does not always correspond to what members say they want.
“For DB trustees or in setting DC default options, the considerations are different, and primarily we would expect trustees to be focusing on impact funds which are attractive investment propositions in the first instance,” he says.
He adds that, as a general trend, most of the impact investing he has seen his clients involved with has been by Local Government Pension Scheme funds.
This "ultimately comes from the culture within administering authorities and how they understand their role", according to Mr McClelland.
In 2017, for example, Pensions Expert reported that the Greater Manchester Pension Fund was in the latter stages of concluding a series of impact investment deals, which would build around 2,000 local homes.
