More than half of pension funds say they hold impact investments, but this is largely focused on environmental issues – only some schemes are making social impact a consideration, new research has found. Is a lack of awareness and products to blame? 

 

Impact investment is becoming more of a topic for trustee boards, but the focus has so far firmly been on environmental impact, a new report by Pensions for Purpose and Big Society Capital shows.  

 

No effective transition without a just transition 

 

Climate has been a core part of recent regulatory changes, so it is unsurprising that environmental impact has been more prominent than social impact. The majority (58%) of those surveyed said this was because of greater awareness of climate matters than social ones, but two-fifths (42%) cited a lack of suitable social impact investment products. Track record and regulation were also mentioned as issues. 

 

Trustees are, however, open to being educated on social impact investment, the research found. While 85% have had training on impact investing, more than three-quarters of trustees would welcome further training.  

 

Gradually, there could therefore be a realisation that social matters are intertwined with environmental outcomes. To those working in the impact space, the link is clear. “The key is to link social and environmental impact. There is a lot of buy-in into environmental impact, but the only effective transition is going to be a just transition,” said Andrew Beal, head of investor relations and client strategy at Big Society Capital, speaking at an event organised by consultancy Barnett Waddingham and Pensions for Purpose on Tuesday. 

 

New LTAF could make impact investing easier 

 

For trustees that hear ‘impact’, fiduciary duty is often the first concern, as investing with a societal outcome in mind can bring up questions about potential conflicts with the outcome for a scheme’s beneficiaries.  

 

“Whenever we talk about impact investing, we have to recognise that the trustee’s duties are to look after their members’ financial interests. This can make it difficult to invest with a dual objective of social impact alongside financial return, unless we can reasonably be confident that the former will not be to the detriment of the latter,” said Natalie Winterfrost, director at LawDeb Pension Trustees. 

 

However, the two are not mutually exclusive. She believes that social infrastructure investment does offer opportunities to invest both for social good and for an attractive return. For defined benefit schemes, which on the whole are derisking, it could be “increasingly difficult to justify deploying new capital into infrastructure development”, she observed, but for defined contribution schemes, the newly created Long-Term Asset Fund should make it easier to access the asset class. 

 

Pension fund resource is another problem – and a key reason why attention has been concentrated on climate so far – but “increasingly my boards are considering the UN Sustainable Development Goals and seeking to add social priorities alongside environmental priorities”, said Winterfrost. She agreed that “to successfully transition to a low carbon economy, we do have to consider the social impact and seek that just transition”. 

 

Should the impact be felt in the UK? 

 

The recent research found that the vast majority (92%) of schemes that already have or are looking at impact investments do so in the UK. Beal said that in light of the recent government white paper on ‘levelling up’, he expects impact investment to become a more significant part of the portfolios of local government schemes, in particular so-called place-based investments. 

 

But this is not necessarily how all trustees look at the matter. “Pension schemes should not be looking to limit themselves to UK levelling up opportunities,” said Winterfrost. “Emerging economies are most in need of support for a just transition. And when it comes to meeting fiduciary obligations, the broader opportunity set, along with the greater potential for diversification, both point to considering global social impact investing.” 

 
There appears to be a gap between perception and reality, particularly when it comes to the availability of good social impact investments, said Alexandra Westley, an associate director at 20-20 Trustees.

Schemes are making commitments in this area, but they may need better education to be able to make those decisions more systematic, she believes. "Understanding the impact of investments they already hold might help schemes to see that adding impact to your list of priorities doesn’t mean bumping assessing the investment characteristics down the list," she said.

 

Schemes might not realise that asking extra questions promotes at least two of the UN SDGs, on sustainable growth and decent work for all, and promoting sustainable industrialisation.

"I would definitely encourage anyone involved in investment decision-making for schemes to read through the UN sustainable development goals. They might find they’ve been following the principles unintentionally," she said.

 

Doing so could also reframe the debate on product availability, which has been cited as an issue in the research. Amanda Latham, policy and strategy lead at Barnett Waddingham, noted that institutional investors that have liabilities need the right instruments with the right profile; currently, “what I’m seeing coming through is [that] some managers have started to build things in this area”, she said, with innovations in social housing, for example. 

 

For one client who has been investing in impact for some time, her firm looked at direct investment through public private partnerships but eventually settled on a manager, “so it’s diversified across a number of projects that manager has in their fund”. Apart from diversification, she said the fund approach also reduces the governance burden. 

 

Beal said the key is that pension funds are prepared to look at private assets, as impact opportunities are in the private space: “You need to be able to resource and have done the thinking around private asset allocation and what you want from that.” 

 

While more pension funds consider that they have impact investment in their portfolios, some still feel that regulation will be needed to push things further. “I think you have to have regulation to support this,” said Charlotte O’Leary, the chief executive of Pensions for Purpose.