The UK’s Local Government Pension Schemes (LGPS) should re-allocate £16bn (€18.5bn) of capital to local “place-based” investments, including housing, clean energy, infrastructure and regeneration, according to report published today.

The white paper, Scaling Up Institutional Investment For Place-Based Impact, has been published by the Place-Based Impact Investing Project, launched by impact-investment organisations The Good Economy, the Impact Investing Institute and Pensions for Purpose.

Co-authored by former Legal & General Capital CEO Paul Stanworth, the report focuses on the potential role of the UK’s £326bn LGPS sector, but also argues that the conclusions are relevant to institutional investors more broadly.

The report found that LGPS already have exposure to what could be categorised as place-based investments, but this was limited to about 1% of portfolios – despite their potential to generate “stable, risk-adjusted returns” while supporting “local and regional economic development” and creating positive social impact.

“If all LGPS funds were to allocate 5% to local investing, this would unlock £16bn for local investing, more than matching public investment”, including the UK government’s recently announced £4.8bn Levelling Up Fund.

The report includes case studies on two of the largest LGPS funds, Greater Manchester Pension Fund and South Yorkshire Pension Fund. The latter, it says, “has a long-standing commitment to investing” locally to generate commercial returns and positive local impacts.

In 2019, South Yorkshire Pension Authority (SYPA), which administers the £8.2bn fund, hired CBRE to manage a local development finance strategy.

George Graham, director of SYPA, said: “LGPS funds have a unique connection amongst investors with places, and over the years a number of funds have made significant contributions to their places whilst at the same time achieving the returns required to meet their liabilities.

“As return becomes more difficult to achieve and, perhaps more uncertain, looking closer to home can provide opportunities to generate the returns we need to meet our liabilities while working to improve the places where our scheme members live and work.”

Councillor Pat Cleary, chair of pensions committee at Merseyside Pension Fund, said: “The project’s focus on how local-government pension funds can be a catalyst for scaling up place-based impact investment recognises our connection with an interest in promoting sustainable development in the places our members live and work.

“This research is building the evidence for investors to identify opportunities to achieve market rate, risk-adjusted returns in key sectors identified as drivers of inclusive and sustainable development between and within regions of the UK.”

Karen Shackleton, director of Pensions for Purpose, said: “We have seen a significant increase in interest in impact investment from the LGPS over the past three years with a growing understanding that it is possible to deliver market rate, risk-adjusted returns alongside social impact.

“This research will allow funds to see what scope there is for such investment and should encourage them to consider introducing a more purposeful approach to their investment strategy.”

The report suggests that LGPS funds could pioneer place-based investing and serve as a catalyst for a wider adoption of the concept by pension funds and institutional investors.

Mark Hepworth, director of research and policy at The Good Economy, said: “As Britain enters this post-Brexit, post-COVID watershed, this report looks at how we can mobilise institutional investment to build back better and put an end to place-based inequalities.”

Sarah Gordon, CEO of the Impact Investing Institute, said: “When we speak about place-based impact investing, we no longer only talk about the need to address long-standing inequalities and support more inclusive and sustainable development across the UK. We now have evidence that shows that there are real opportunities for investors to secure financial returns while doing so.

“Connecting private capital to deliver positive impact, in the places that most need it, is not only crucial to building back better after the coronavirus pandemic, it also has the potential to unlock significant investment in local businesses, quality jobs, affordable homes and town-centre regeneration that can bring us one step closer to a truly sustainable economy.”

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