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Impact investors shifting gears to accommodate specific goals

Mike Weston believes impact investments must be done to benefit society. The PIP so far has put most of its money toward housing and schools.

The trend of impact investing — into companies, organizations and funds with the aim of investing for social and environmental good, as well as a financial gain — is becoming more specific.

“We are seeing increasing interest from local authority pension funds, the charity and foundations sector and from some corporate pension schemes in impact investing,” said Kate Brett, London-based senior responsible investment specialist at Mercer Ltd.

“We have seen two different camps: some are driven by an existing corporate responsibility program, and are looking at how that could be reflected within their pension scheme investments. ... The other camp likes the idea of impact investing, but wants to do it locally.”

U.S. public funds, including public employee pension funds, had allocated almost $87 billion to place-based investing — where investors target a defined geographic area for financial returns as well as to benefit that area — as of Dec. 31, 2013, according to US SIF, the forum for sustainable and responsible investment.

In its “U.S. Sustainable, Responsible and Impact Investing Trends 2014” report, published this month, the forum said place-based investing is receiving “recognition as a focus for SRI” and has “emerged as a new trend, accounting for nearly $90 billion in assets.” Among the 12 institutions reporting this type of allocation, descriptions included “economically targeted investment” and “local investing.”

The report said investors invested locally to improve their home state's economy, expand the tax base and to improve “future funding ratios for the pension fund. Improving infrastructure and affordable housing in an area may also directly increase beneficiaries' quality of life,” said the report. The report highlighted the $46.6 billion New York City Teachers' Retirement System, which committed $1 billion to investing in infrastructure in New York City and the tri-state area after Hurricane Sandy hit in 2012.

But figures from data provider eVestment LLC, Marietta, Ga., show varied institutional inflows. In the three months ended June 30, non-U.S. impact investing inflows totaled $886.6 million, an increase of 44% compared with inflows for the same period a year earlier. Total assets in non-U.S. impact investing were $29.9 billion at June 30, 2014. For U.S. institutional oriented investment, impact or environmental, social and governance investing recorded $2.2 billion of outflows in the three months ended June 30. However, that followed $3.6 billion of inflows in the previous quarter. Total assets were $89.3 billion at June 30.

While global specific local investment could not be quantified, the trend is gaining ground:

  • The “California Initiative” of the $296 billion California Public Employees' Retirement System, Sacramento, commits capital to companies located in traditionally underserved markets, primarily in California. This month, the fund committed $80 million to a new, California-focused private equity fund run by Grosvenor Capital Management LP, in an effort to revitalize the initiative, which was launched in 2001 as a $1 billion private equity investment but has had poor returns.
  • Six U.K. local authority pension funds committed a total 152 million ($238.6 million) to social impact funds in June, with a focus on positive social and environmental outcomes in the U.K. The pension funds are the 10.5 billion Greater Manchester Pension Fund, Manchester; 10 billion West Yorkshire Pension Fund, Bradford; 10.1 billion West Midlands Pension Fund, Wolverhampton; 5.6 billion South Yorkshire Pension Fund, South Yorkshire; 5.8 billion Merseyside Pension Fund, Liverpool; and 3.4 billion East Riding of Yorkshire Council Pension Fund, East Yorkshire. The commitments are part of pension fund initiative Investing4Growth.
  • The West Midlands Pension Fund also committed 40 million to a “Finance Birmingham” program in the year ended March 31, 2014. The project provides finance to small and local business ventures in the West Midlands. The WMPF also committed 50 million to the Pensions Infrastructure Platform, a project designed to give pension funds greater access to infrastructure projects in the U.K.

“There is a need and requirement and incentive to make sure that these investments are all done to benefit the public and society in general,” said Mike Weston, London-based CEO at the Pensions Infrastructure Platform. “Schools and hospitals and renewable energy are areas of infrastructure we are looking at.”

The PIP's first fund, managed by Dalmore Capital Ltd., had its first close in February with 348 million of commitments. As of early November, 221 million had been invested, “predominantly (into) houses and schools,” said Mr. Weston.

Future is local

“We quite like the idea of local investment,” said Tim Currell, Leeds and London-based partner in Aon Hewitt's global investment practice. “A pension scheme could argue that it is about long-term, member quality of life, as well as long-term member financial security.”

He said financial prospects and risk/return characteristics must come first, “but if there are good expected returns, and it also benefits the local community,” then that is a good thing.

That caveat is acknowledged by both money managers and plan executives.

Eloy Lindeijer, Zeist, Netherlands-based chief investment manager at PGGM, told delegates at the WorldPensionSummit conference, held in The Hague in November, that the €178 billion ($223.7 billion) fiduciary management firm had a mandate to “look at the growth contribution we can make to the Netherlands.”

“We have had the ability to invest in the economy — bringing capital to invest and get the economy going again,” he said. “There is a large part of the Dutch housing stock that needs to be renovated to reach higher standards of efficiency. We are looking at opportunities to buy into the Dutch market, and at the same time maybe renovate housing to bring it to a higher energy efficiency. That is good investing sense — if we can contribute to the Dutch economy, then we will do it.”

Guido Verhoef, PGGM's head of private real estate, said in a separate conversation that risk/return considerations will always come first. “We don't give in on those aspects,” he said. “But it is also important to add something extra to the local community: that can be all over the globe.” The manager invests about €18 billion in real estate, with about €4.5 billion to €5 billion of that in the Netherlands.

Defined contribution plans also are looking locally. Paul Todd, London-based assistant director of investment at the National Employment Savings Trust, London, said local and impact investment is a way of engaging savers.

“When people realize their pension fund isn't just about retirement, but has an impact on day-to-day living and on the environment and society and communities, that can be a fruitful way of opening a dialogue,” he said.

The 260 million plan is currently constrained in its social impact investing. “The primary goal is to get as much diversification as possible and to keep costs down,” he said. As the plan grows, the primary concern will remain risk/return, but “that doesn't mean we shouldn't take other ideas into account. As we get into infrastructure, say we have two projects with similar risk/return (characteristics): we would be more interested in things that would have a positive impact in the U.K. ... If we could do things that improve members' day-to-day lives, then that is a perfectly reasonable thing to consider.”

And showing participants what their “hard-earned salary” can do for them helps, said Chinelo Anohu-Amazu, director general of Nigeria's National Pension Commission, Abuja. “If you build a house, it is over a person's head, he can see it. Or a road. You are not telling him his hard-earned salary you have taken away from him is going into some esoteric bonds and accounts,” she told delegates at the WorldPensionSummit.

This article originally appeared in the November 24, 2014 print issue as, "Impact investors shifting gears to accommodate specific goals".