The UK is one of the most regionally unequal countries within the 38-member Organisation for Economic Cooperation and Development. Could place-based impact investing provide a solution?
Three years since the publication of a major study by the Impact Investing Institute (III) on the topic, place-based impact investing remains a key issue, according to the organisation’s latest report “Place-Based Impact Investing: Emerging impact and insights”. The report shows that the supply of capital seeking a place-based investment approach is increasing, while the enabling infrastructure to support it is being built. There is also an increasing demand for impact capital.
“Addressing the UK’s major challenges, such as delivering affordable housing and transitioning to a net zero future, will require significant levels of investment,” the III wrote.
While the British government‘s ‘levelling up’ agenda plans to invest £1bn (€1.2bn) in revitalising its most deprived regions, an investment of more than £1trn will still be needed in the next decade. The responsibility for addressing those challenges “clearly cannot be borne by the public purse alone”, the III said.
Transformational role of the LGPS
Place-based impact investing, which typically sees a particular location, such as a city or region, teaming up with financial institutions, could play a vital role. The aim is to deliver positive social and environmental solutions, while also providing investors with a financial return.
Research conducted in 2021 by the III and The Good Economy found that only 1% of the assets of the UK’s Local Government Pension Schemes (LGPS) pools, which were worth £326bn (€382bn) at the time, could be identified as place-based impact investments.
With LGPS assets rising to around £400bn this year, they not only represent “a significant pool of institutional capital”, but also have “strong connections to places, and have decentralised decision-making powers”, according to the report.
If just 5% of those assets under management were going into local places, that would unlock £20bn in additional investments each year to address regional disparities, the III calculated.
Aligning just a small portion of their investments with place-based investing “could benefit both the LGPS and local communities, cultivating prosperous economies and inclusive growth. This symbiotic relationship could lead to both robust pension fund returns and local economic development,” the III said.
But for LGPS funds to reach the 5% target, many will need to invest in commercially viable opportunities that are outside of their specific regions.
Progress
Since the publication of its 2021 paper, progress has been made, the III said.
In 2022, the UK government adopted the Institute’s recommendation for 5% of LGPS assets to be invested locally in its levelling up white paper. Since then, research by the III has showed there has been a “marked increase” in new LGPS investments into real economy opportunities across the UK.
This has led to the creation of a host of innovative investment strategies for scale and diversity. A recent survey showed close to two-thirds of LGPS funds are now planning to ramp up their allocation of local investments, according to the III.
An increase in UK local authority pension funds investing in place-based impact projects could “pave the way for a multi-billion-pound market”, Schroders Greencoat said in February. Schroders Greencoat recently took a majority stake in the largest operational solar deal across the UK.
The Bristol project
With UK cities and councils increasingly struggling to pay for the delivery of public services amid sluggish economic growth, local authorities from Bristol to Blyth are becoming more proactive in seeking partnerships with private sector investors, the III said.
Take Bristol City Council, which struck a 20-year joint venture with American renewable energy company Ameresco and sustainable energy firm Vattenfall Heat UK, aimed at delivering more than £1bn of investment into the city’s energy system.
The report also highlighted a growth in investment products targeting positive local outcomes, such as Schroders’ Real Estate Impact Fund and Gresham House’s Sustainable Infrastructure Fund, which recently landed a £450m investment from eight LGPS funds.
It also emphasised that the enabling infrastructure to support PBII is being built. This infrastructure includes blended finance mechanisms, such as the UK Infrastructure Bank’s loan guarantees.
