Pension funds can play a central part in levelling up the UK

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by Mark Hepworth, founder and research director, The Good Economy

Levelling up is old news. As a country, we’ve been talking about ‘levelling up’ since early last century – it was just called something else during the Jarrow March of the 1930s.

Few of us would disagree with its message, and that of build back better.

But the £1tn question on everyone’s lips is: how are we going to do it?

We’re actually closer to the answer than some might think. There is a pool of patient, responsible, private capital that has the interests of building sustainable futures at their core and can more than match the public investment allocated to ‘level up’. 

Pension funds are already seeking a socially efficient allocation of capital, with stated commitments to environmental, social and governance and sustainable develoment goals. This equitability of profit and purpose already has a name in the investment industry: impact investing.

Impact investments, which are made with the intention of yielding suitable long-term, risk-adjusted financial returns as well as positive impact, now run into the trillions of dollars. 

And that’s just a fraction of what could be deployed by pension funds. 

Right place

What’s really exciting is the new intersection where impact and fiduciary duty can meet; where the worlds of institutional investment and economic development collide; where inclusive growth aligns with sustainable development. That intersection is place-based investment.

Place-based impact investing is where we can reconnect institutions to the very substance of what they are here to steward: a sustainable future.

They are investments made with the intention of yielding suitable long-term, risk-adjusted financial returns as well as positive local impact, addressing the needs of specific places to enhance local economic resilience, prosperity and sustainable development. 

And they have the potential to harness a multi-trillion pound pension fund industry to work for build back better and levelling up.  

Looking closer to home

There is an opportunity in localising what is all too often globalised investment by default, bringing capital back closer to home, to the regions and the localities from where it came.

And there is a natural starting point when considering institutional investment in places, in the real economy – the Local Government Pension Scheme.

LGPS funds worth £326bn already have a stake in the places around them, but could reap a multitude of benefits for the people and communities they represent, simply by embracing more of a place-based investment strategy.

Yet currently only a small fraction of UK pension money is invested directly in the UK in ways that could drive more inclusive and sustainable development, in sectors like clean energy, infrastructure, social and affordable housing and SME finance.

That’s why The Good Economy, the Impact Investing Institute and Pensions for Purpose have come together to propose a new model to mobilise investment in places: place-based impacting investing. The initiative has the backing of UK government and the City of London Corporation, as well as Big Society Capital.

It's also got the support of some of the major LGPS funds, as well as the Make My Money Matter campaign, co-founded by film director Richard Curtis. 

Making the case for place 

This is a project from within the industry. We’ve taken the insight, input and knowledge of around 80 market participants, from local authorities to LGPS funds, fund managers and consultants, and thought long and hard about the opportunity and the barriers.

That’s what makes it a stakeholder model, with a true alignment of interests, objectives and values, all centred around one area: placemaking.

We know that institutional investors, including LGPS, turn to the global capital markets by default – but we can show allocations closer to home can deliver comparable returns and diversification, while benefitting local communities.

Secondly, we recognise we need to scale up to make this work for investors, and work in a coordinated way that will address economic plans and drive sustainable growth in local places.

Thirdly, we know there needs to be a framework within which we can see the impact, and measure it. That requires transparency and accountability. 

And there are clear benefits for investors too. PBII offers a way for impact to meet fiduciary obligations; where purpose can meet financial returns.

Investments in key UK PBII sectors provide stable, high, long-term returns and low volatility versus other mainstream asset classes.

Investments in most of the place-based sectors are generally in real assets, such as housing and infrastructure, so can also provide income streams and a number of investment-grade opportunities. Place-based assets are generally illiquid and often command higher returns as a result, making them attractive from a portfolio diversification and financial return perspective. 

What needs to happen

While this feels like a watershed moment, we know we have hearts and minds to win. 

Seeing is believing when it comes to the investor community. We have seen what can be done, by pension funds like Greater Manchester Pension Fund, and in places like South Yorkshire.

What stands in our way now are the perceived blockages and bottlenecks – all of which are very surmountable.

Our next steps are to raise awareness about the PBII opportunity, and to continue the conversation with pension funds, fund managers and consultants, along with the stakeholders in the places we are talking about. 

We also need to facilitate and support an increase in capacity and expertise across the LGPS  for place-based investment.

None of this is worth much if there isn’t a reporting mechanism for place-base impact. 

And there needs to be a way to connect investors with PBII opportunities. We have to scale up institutional grade PBII investment products and funds.

We’re at the start line with place-based impact investing, but all of this is achievable.

And if we can deliver on all of those themes, then we think we’re onto something that turns that dial; mobilising capital that works for the many, not just the few.

When you put it in those terms, levelling up doesn’t sound quite as abstract as it did before.

The PBII Project’s white paper Scaling up institutional investment for place-based impact is available here. To be kept up to date about the PBII Project, sign up here.

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