As the UK government moves forward with reforms in the local government pensions sector, Anna Shiel, chief investment officer at Better Society Capital, explores the challenges and opportunities of leveraging impact investing to drive local growth.
Since Rachel Reeves took office as the UK’s first female Chancellor in July last year, the horizon for the UK’s Local Government Pension Schemes (LGPS) has become clearer. Her landmark Mansion House speech in November outlined decisive reforms for LGPS pools and initiated the Pensions Investment Review, including local investments. This is where impact investment can and should come in.
Better Society Capital, and our partners at the Impact Investing Institute, have been championing local growth through impact investment. Our work with LGPS funds across the UK has focused on identifying and facilitating place-based investment opportunities that both fulfil fiduciary responsibilities to deliver appropriate risk-adjusted returns and generate local economic growth and social progress.
The opportunity
The scale of the opportunity is striking. Analysis from the Impact Investing Institute found that a 5% allocation of LGPS capital toward local investing could mobilise what would now be £20bn (€24bn) for previously untapped growth areas across the UK economy. While directing capital locally of course requires careful consideration, we’ve witnessed several LGPS funds successfully implement these locally-focused models, demonstrating that local investment can serve both investor interests and local impact.
In our response to the Pensions Review consultation, we advocated for expanding local investment opportunities that align with LGPS risk-return parameters. We highlighted key focus areas including social housing, SME finance, and renewable energy, alongside emerging sectors such as social infrastructure, natural capital, and preventative healthcare as underinvested asset classes with high potential for local impact.
The challenge
We recognise the complexities LGPS face in this transition. Promising investment opportunities often require substantial development, resources are constrained, and expertise in place-based impact investing remains limited. Success will depend on knowledge sharing, appropriate resourcing, and systematic capacity building through cross-sector partnerships, and the impact investment sector can provide that transitional support.
One way this might happen is for impact investment specialists to demonstrate the potential of particular types of local investment, with mainstream commercial investors – such as LGPS pools – then coming in to support scale ups.
An example of this in practice is an investment we and other socially-minded investors made funding Community Development Finance Institutions (CDFIs) in 2018. CDFIs play a vital role in channelling capital to underserved markets, particularly outside the traditional economic hubs of London and the South East. Their deep local networks and expertise enable them to identify promising SMEs in deprived areas and those led by disadvantaged groups – opportunities for place-based investments that might be overlooked by conventional institutions. The success of ours and others’ funding led to the launch of a £62m CDFI fund (the second phase of the initiative) early in 2024, which gained the backing of mainstream lender Lloyds Banking Group.
We believe LGPS funds and pools are uniquely positioned to advance local investment strategies, thanks to their decentralised structure and local decision-making authority. This enables them to forge productive partnerships with regional stakeholders such as CDFIs and combined authorities and drive collaborative initiatives.
The Greater Manchester Pension Fund’s experience illustrates the potential: their ‘2024 Placed-Based Impact Report’, produced by The Good Economy, found that their 5% local allocation has created employment opportunities, supported SMEs, and funded crucial developments in housing, renewable energy, and infrastructure. Recent consultation responses indicate growing appetite for impact investment, with the LGPS Advisory Board explicitly recognising that local investment naturally aligns with both social impact and financial objectives.
The work ahead
Our current government’s commitment to inclusive growth and local investment creates a unique opportunity. With the foundational elements now in place, central government can accelerate progress by clarifying fiduciary duty guidelines for local investments and exploring risk mitigation strategies and incentive structures. Local authorities will also need support to structure investments suitable for institutional capital.
Organisations like ours and the Impact Investing Institute stand ready to share expertise, build capacity measures, and overcome barriers to local impact investing. By bridging public and private sector collaboration, we can amplify the LGPS sector’s ability to discover compelling investments that serve both investors and communities. It is clear to us that the path to sustainable local growth runs through strategic partnership and targeted impact investment.
Anna Shiel is chief investment officer at Better Society Capital.
