Caroline Escott examines the growing interest in patient capital and social impact investing.
As long-term owners of capital, pension funds are ideally placed to invest in a long-term way. This is increasingly a focus for DC schemes, with auto-enrolment bringing in a younger cohort of savers who are more likely than previous generations to want their retirement savings to have a positive impact on society, the environment and the ‘real’ economy.
At the same time, the recent market and financial environment has made getting good risk-adjusted returns tricky for all schemes, especially for those which undertook significant de-risking in the wake of the financial crisis. There has therefore been growing scheme interest in investing both in illiquid assets (thus benefiting from the attached premium) and investments which incorporate environmental, social or governance factors to achieve a beneficial impact
However, growing interest does not necessarily directly lead to growing portfolio allocations, and as a result the last few years have also seen UK policymakers focus their attention on how to encourage UK pension schemes – with their £2.2 trillion in assets under management – to consider predominantly illiquid investments in certain key areas.
Recent years have seen several initiatives aimed at encouraging investors to consider using their capital to generate positive social outcomes
One such initiative has been HM Treasury’s patient capital work, which aims to increase the supply of capital to innovative, entrepreneurial firms and projects. A key strand of this work is the Pensions Investment Taskforce; this was announced by the Chancellor in his November 2017 Budget, is chaired by senior Treasury official Charles Roxburgh, and has a remit to think about how to overcome any real and perceived barriers to DB and DC pension scheme investment in patient capital projects.
The PLSA sits on this Taskforce, alongside others from across the pensions and venture capital industry, and will be feeding in member views and practical experiences in this area. We’re also hoping to pull together guidance for schemes. Member experiences and views on this issue will be invaluable – if you’d like to get involved or share your views on investing in patient capital initiatives, please do get in touch.
Making an impact
Another key government focus has been on social impact investment. In contrast to ESG investment, which is often undertaken to improve risk-adjusted returns over the medium to long term and is better established, social impact investment (SII) is still a relatively new market and includes investments which aim at both a specific financial and social objective. This can include anything from investment in social enterprises to the buying of financial securities which fund (for example) firms which help rehabilitate ex-offenders or provide rental accommodation to homeless individuals.
In the wake of former UK Prime Minister David Cameron’s Big Society agenda, recent years have seen several initiatives aimed at encouraging investors to consider using their capital to generate positive social outcomes.
One of the most influential has been the Social Impact Investment Advisory Group, led by Elizabeth Corley. This published its report Growing a Culture of Social Impact Investing in the UK in November 2017, which made a series of recommendations to industry, regulators and policymakers to boost the impact investment market.
There is significant policymaker will behind the patient capital and social impact investment agendas in particular
The PLSA had a role on this advisory board, and in March this year we published an Impact Investment Made Simple Guide with Hermes Investment Management to inform trustees about the practicalities of investing in this growing market. We’ve also been invited to take part in the follow-on Corley Steering Group: we’ll be leading the sub-group responsible for making it easier for people to invest to achieve social impact through their pensions.
As schemes search both for better, diversified returns and to better reflect the attitudes of new pensions savers, illiquid investment into the real (innovative) economy or projects with a positive social impact should be added to the array of options under consideration. There is significant policymaker will behind the patient capital and social impact investment agendas in particular, making this a good time to think more broadly about how schemes can invest for the long-term benefit of their members and society.