In February 2022, the UK government’s new Levelling Up white paper set a target for all local government pension funds and pools – namely the goal of investing 5% of their assets in projects that support local areas.
With these funds holding assets in the region of £330bn, it was estimated that if this target was met, it could direct £16bn of new investment towards some of the UK’s most deprived communities.
‘The pandemic has put a spotlight on many systemic deficiencies and structural challenges that are now exacerbated by the cost of living crisis. Basic life essentials are still lacking in so many places which also translates into unequal opportunity for talent.’
The government’s proposals are just one example of so-called place-based impact investing, using investments to achieve social and environmental objectives in a particular area. This can range from meeting needs such as community regeneration and affordable housing, or supporting a transition to net-zero.
In the wake of the Covid-19 pandemic and the current concerns about energy prices and the rising cost of living – which have both exacerbated and highlighted the deprivation and social inequalities across many parts of the UK, investors have become far more mindful of how they can use assets to drive change.
‘Covid-19 has motivated more governments, companies, issuers and international bodies to lean into social financing,’ says Louise Kooy-Henckel, director of Impact Investing at London-based Wellington Management.
‘The pandemic has put a spotlight on many systemic deficiencies and structural challenges that are now exacerbated by the cost of living crisis. Basic life essentials are still lacking in so many places which also translates into unequal opportunity for talent.’
But while the concept of value is evolving, place-based impact investing is not necessarily philanthropy, for it can also increase returns across a portfolio by enabling access to new markets and different revenue streams.
Kooy-Henckel explains that many clients use this form of impact investing as a potential return enhancement as well as a diversifier within portfolio allocation.
This is because these investments can also be non-correlated through economic cycles, thus building portfolios that are more resilient to shocks in the wider economy.
Analysts feel that this is one reason why UK pension funds are starting to take more of an interest in investing through an impact lens as resilience and sustainability are both important factors in building long-term investment portfolios.
‘Investors are starting to realise that there are mutual benefits from place-based impact investing,’ says Shadi Brazell, senior programme manager at the UK Impact Investing Institute.
‘The place-based impact investing market in the United States is more mature than in the UK, and demonstrates that there is an enormous amount to be gained from closer partnership between mainstream financial institutions and places, both in financial returns and outcomes.’
Brazell highlights the exceptional performance of the Clwyd Pension Fund as an example of what place-based impact investing can achieve. At present, 4% of the fund’s £2.4bn in assets are allocated to local and impact investments with the aim of catalysing economic growth, particularly in deprived areas.
This strategy has already reaped rewards, with the fund’s March 2022 quarterly monitoring report revealing that the local impact investments yielded returns of 40.3% compared to 26.4% from private market assets such as property, private equity and infrastructure investments.
Other specialist impact funds have been established in recent years such as Resonance, a social impact property fund manager that works with institutional investors and expert housing partners to provide safe, affordable homes with wrap-around support for communities facing crises.
‘Datais just one way to measure success and it should ideally be used in conjunctionwith voices on the ground, where impact investments are taking place.’
But identifying relevant schemes for channelling money is not a straightforward process. Kooy-Henckel says that Wellington Management rely on a bottom-up process for identifying and analysing new investment opportunities that is rooted in proprietary research and deep diligence.
‘We think investors should consider a range of criteria,’ she says. ‘This includes the importance of the social problem being addressed, what the impact of the investment would be on the targeted community, and whether the impact investment truly addresses the unmet needs of a targeted or marginalised demographic such as women, minorities, low-income, elderly or rural populations.’
James Burrows, managing director of social lending at the Schroder BSC Social Impact Trust, says that successful place-based impact investing requires close engagement with the regional and local functional economic and government areas, as well as the specific communities where the capital is being deployed.
‘You need to ensure that the investments are creating value and meeting needs in these places rather than extracting value from them,’ he says. ‘There should be people in the team or as advisers with deep knowledge of the local markets, which can be very different in different places and may have idiosyncratic characteristics. Successfully navigating this can also bring wider portfolio diversification benefit.’
Working closely with local communities can build strong long-term partnerships for investors as well as help to risk-mitigate the investments in the short-term, but there is still the question of how best to define impact and quantify the difference which has been made to that community.
Brazell says that using a robust framework for reporting, measuring and managing impact can help. Meanwhile, the Schroder BSC Social Impact Trust set clearly defined targets for their impact strategy, which can range from the number of families accommodated in affordable housing to the number of new apprenticeships supported. These are then assessed and evaluated on an annual basis by an external consultant.
‘Data is just one way to measure success and it should ideally be used in conjunction with voices on the ground, where impact investments are taking place,’ says Kooy-Henckel.
‘It is also very important to have broad stakeholder engagement. Listening to the voices of all those affected by a given investment and understanding how it changed their experiences can provide a powerful perspective to help inform investment decisions.’