Why the pension fund of the former British industrial powerhouse has turned to place-based impact investing to make a difference.
In June, British tech and telecommunications giant BT Group opened a new state-of-the-art office building in the middle of Sheffield, a city based in South Yorkshire, in north-central England.
Based at Sheffield Digital Campus, BT’s eight-storey building offers multi-use office space as well as a rooftop terrace, and will act as the firm’s base for up to 1,000 employees.
A £10m (€11.8m) place-based impact investment (PBII) by the South Yorkshire Pensions Authority (SYPA), which manages £10.9bn in assets, played a key role in getting this project off the ground.
“That wouldn’t have happened unless we had financed it because the developer couldn’t get finance from the banks,” George Graham, director and head of paid service at SYPA, told Impact Investor in an interview.
“Banks have stopped lending to support developments at a particular scale, the £5-£20m developments are very difficult for developers to finance from banks,” said Graham, who joined SYPA in 2018, a year before it decided to start a PBII allocation. “That’s where our development lending has been targeted.”
As previously reported by Impact Investor, PBII is gaining momentum in the UK, the Impact Investing Institute said in a report last month. According to the report, the supply of capital seeking a place-based investment approach is increasing, while the enabling infrastructure to support it is being built.
“There is a market failure there, and we are stepping in to address that and making money out of it. And because we are doing that, stuff is happening that wouldn’t otherwise have happened,” he added.
Collapse of steel, mining industries
SYPA manages the pension schemes of four South Yorkshire district councils and nearly 600 other employers.
A former industrial powerhouse, South Yorkshire’s economy still bears the scars from the collapse of its coal mining and steel industries in the 1980s, while it also struggled following the global financial crisis of 2008. As a result, the current South Yorkshire economy trails the rest of Great Britain in terms of economic activity and jobs, while the region is also suffering from poor public transport.
“Anything we do in the impact side of the book has to meet the same financial hurdles as anything in the non-impact side of the book.”
Still, South Yorkshire has a strong presence in advanced manufacturing and engineering and education, which has attracted employers including McLaren, Boeing and Rolls-Royce to the area. It is also increasingly positioning itself as a clean energy economy.
As SYPA has had a long-term commitment to investing within its own region – in order to generate both a profit as well as positive local impacts – the move to impact investing made perfect sense, according to Graham.
“Like all local government pension scheme funds, our board is made up of elected councillors and they have an understandable desire to do things which are positive for their particular place,” said Graham.
“Equally, they also accept that while legally not trustees, they are in effect the trustees of a pension scheme which doesn’t belong to them or a council, it belongs to the scheme members. So, they were looking for a way to reconcile those two theoretically competing issues and actually thinking about investment in terms of the impact they have.”
PBII allocation
SYPA, which had been actively engaged with responsible investment for many years, started its PBII portfolio in 2019 with an allocation of £80m to direct development lending. That specific allocation has since grown to £130m, according to Graham. SYPA has made investments across all the key PBII sectors including SME finance, affordable housing and renewable energy.
Following a workshop with Pensions for Purpose in 2020, SYPA decided to aim for an allocation of up to 5% to impact investments, including 1% of the fund dedicated to PBII in South Yorkshire. In addition, the fund had previously set a goal to achieve net zero by 2030.
SYPA’s current allocation toward impact investments is between 3.5% and 4%, which is expected to reach 5% by 2028, according to Graham. “That’s a level within the fund that we feel comfortable with, in terms of the risk and concentration,” Graham said.
In addition, SYPA folded a legacy of impact funds which it had invested in before starting the PBII approach into the new portfolio.
SYPA is now measuring the impact those funds have, which according to Graham has been “quite a revelation” in terms of jobs created and the volume of housing financed.
“Because they’re in closed end funds, as those funds roll off, we’ll reinvest that in a more specifically targeted mix,” said Graham, adding that the total PBII portfolio currently stands at about £350m. The aim is to get it up to £500m.
To date, SYPA’s local investment strategy has targeted long-term investments aimed at solving local economic, social and environmental problems that traditional investors would shy away from.
Performance
These include loans for the redevelopment of former foundries into 52 low carbon homes in Sheffield, aimed at retaining young graduates in the region. A regeneration of an old coalite plant in Derbyshire is expected to generate more than 2,000 local jobs.
Graham estimated SYPA spends as much time on the 5% impact allocation as it does the 30% of the fund that is invested in listed equities. Has it been worth it in terms of performance?
“It’s met its benchmark returns, the targets we’ve set for it, in fact it has exceeded it,” Graham said, though he was unable to comment on details. “In performance terms, it isn’t a part of the fund that causes me concern…It’s at the lower risk end of the spectrum, when looked at as a whole chunk.”
Graham emphasised SYPA “are investors, we are not philanthropists. We need to invest to pay pensions. So, anything we do in the impact side of the book has to meet the same financial hurdles as anything in the non-impact side of the book.”
