There have been occasions over the last few decades when a new concept, investment approach or asset class has suddenly attracted interest and, within a matter of months it seems, everyone is talking about it. A fuse is lit and, in no time at all, the fire catches. So it is with impact investment – it is the 2018 topic of the year. All of a sudden, every investment conference on the block is advertising at least one session on impact investment, with mainstream managers and niche boutiques all vying for attention.
Impact investment is not the same as ESG. Nor is it responsible investment. It is also not philanthropy. Rather, it is an approach in which the investor still receives a financial return but the investments are intentionally chosen to generate a positive social or environmental impact, which is quantified and measured.
The nature of impact investments generates a natural alignment of interest with local authorities. In the UK, local authorities are familiar with many of the social and environmental challenges these investments are looking to address. Indeed, if a local authority can attract private capital to invest in residential property to house the homeless, then that should have a direct impact on the budget that authority requires to address homelessness in its county or borough.
Within the UK’s Local Government Pension Scheme (LGPS), there is likely to be member interest in this type of investment, given that staff have had to deal with residents’ social and environmental issues over many decades. In addition, as a pension scheme, the LGPS can afford to take a long-term view with its investments, thus allowing its fund managers time to maximise both the financial return and the impact. Some social and environmental issues take many years to address.
Given the natural alignment of interests, it is somewhat surprising that, to date, LGPS allocations to impact investment have been relatively modest. Pensions for Purpose, a collaborative not-for-profit platform that aims to raise awareness of impact investment, lists several case studieson its website, and many of these include descriptions of the journeys by LGPS funds such as West Yorkshire, Berkshire, Merseyside, Greater Manchester and the Environment Agency in establishing an impactful investment approach. This journey typically begins with a discussion on ESG, then progresses to a debate around responsible investment, including, for example, the ‘divestment versus engagement’ debate. Eventually, impact investment is on the agenda.