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Using pensions to fund impact investment


Karen Shackleton

Director, Pensions for Purpose

Impact investment by UK pension funds is beginning to catch on, with most investment conferences now including a discussion on this topic. 

There is a lack of knowledge in impact investment

Pensions for Purpose, an impact investment information platform, has seen rapid growth in membership in its first year, with nearly 50 Affiliate members (typically pension funds and their advisers) signing up to learn more about this topic. To date, local authority pension funds seem to be quicker off the mark than corporate pension funds. Indeed, MJ Hudson Allenbridge’s 2017 research into impact investment by corporate funds identified three key barriers which were holding back funds from investing with impact:

  • 64% of funds said they lacked knowledge on impact investment.
  • 82% indicated it was the lack of risk/return data on these types of funds.
  • 68% said they relied on their investment consultant for recommendations and impact investment had not been mentioned.

These concerns were reinforced in a recent poll of local authority pension funds by conference organiser LAPF. Here, concerns over speed of investment and the ability to scale up the size of investments were also mentioned, unsurprisingly given the size of these large, local authority funds.

The vast majority of investments deliver satisfactorily

Scepticism over returns also remains a barrier and trustees are rightly concerned about their fiduciary responsibility to the members of their pension fund to deliver the best risk-adjusted returns, given the liability profile of those members. Yet the 2018 survey of investors by the Global Impact Investor Network (GIIN) revealed that 91% of investors held impact investments that had delivered satisfactorily to the financial expectations they had when they first invested. 

Two-thirds of the investments in the GIIN survey were in market-rate, risk-adjusted return impact funds. Such a high degree of confidence in financial deliverability undoubtedly gives impact investments an edge over their purely commercial alternatives. Pension fund trustees are regularly in dialogue with managers of commercial funds over returns that have failed to deliver to the expectations set out in the manager’s original sales pitch. Part of the reason for this could be that a pension fund can assess impact managers on both financial and environmental/social impact criteria. This makes it easier for the manager to present a more realistic and achievable financial return because they can then talk about their competitive edge in achieving impact.

The start of a pension fund’s journey towards impact investment is to discuss investor beliefs. This will determine how best to introduce impact investments into the investment portfolio. Some funds are making separate allocations to impact funds. Others are treating it more holistically and introducing impact themes across their whole portfolio. Impact measurement is also coming under increased scrutiny, as managers assess how best to measure their impact against the Sustainable Development Goals. Pensions for Purpose aims to help investors with these discussions by providing relevant and informative content on its online platform.

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