The conversation on impact investing in the pensions industry is growing in volume and reach. But with myriad social and environmental issues still requiring solutions, and $12 trillion to be gained by those that address them, the focus must now be on how to move from talk to action.A recent webinar, hosted by Bethnal Green Ventures and Connected Asset Management, brought together a panel of pioneers in this space to explore just this. The discussion, which can be re-watched in full here, covered different approaches to allocation, a move towards private markets, and how to set an impact strategy. The panel was made up by Jamie Broderick - Director at the Impact Investing Institute, Charlotte O'Leary - CEO at Pensions for Purpose, Callum Stewart - Senior DC Investment Consultant at Hymans Robertson, and Paul Miller - CEO and Managing Partner at Bethnal Green Ventures (BGV). Rachel Neill - Chief Impact Officer at Connected Asset Management, moderated the discussion.
From risk to opportunity
Impact investing isn’t new to the pensions industry, but the way people are thinking about it is. Charlotte began by explaining that impact often used to be categorised as philanthropic, with the implication of concessionary returns, but not anymore. “Things we once externalised, or didn’t understand, such as climate change, are beginning to be embedded into the way that we look at risk return. And not only in terms of risk but actually in terms of opportunity” she explained. Callum agreed. From an investment consultant’s perspective, he said, “the main word to summarise impact investing is ‘opportunity’.” Adding that, it’s both a great opportunity to help clients to do good in the world but also to deliver improved financial returns. Interestingly, he shared a recent example from his work at Hymans, where a colleague on the Governance Committee challenged a move to a more sustainable approach asking - is this far enough, shouldn’t we be thinking about impact?Paul echoed the sentiment that one of the biggest opportunities that impact provides is for member engagement. He spoke about how much BGV’s existing investors value hearing about the companies they’re invested in such as Fairphone - the world’s most ethical and sustainable smartphone. “Not only that”, he said, “but our impact is measurable - we can give investors figures on how many lives their money has positively impacted.” Increasing member engagement increases member contributions and Charlotte pointed out that the contributions have more of an impact than the investment returns themselves. “If funds can engage their members that in itself is a great story.”
Different approaches to allocation
So the opportunity for pension funds in impact investing is clear. But how should it be approached? “It's legitimate to have multiple lenses and multiple ways of looking at it,” said Jamie. “I can't think of an asset class where you can't have impact. So anybody who has an investment portfolio with an asset allocation could be incorporating impact investments.” He gave the example that if you have a venture capital allocation, then you can invest in impact venture, through the likes of BGV. Charlotte presented another way of looking at allocating to impact, for example funds that are aiming to address place based or regional issues. In those cases, she explained that you may need to be able to combine asset classes in order to reach a potential impact, rather than just doing impact in one asset class. Jamie agreed that the likes of local government pension schemes often have a very strong sense of place and community and have taken a much deeper interest in impact than maybe others, citing Greater Manchester as a great example.
Moving towards private markets
Regardless of approach to allocation, Jamie clarified that it’s vital to distinguish between investor impact and enterprise impact. In other words, owning impact is not the same as creating impact. He went on to explain that most impact investing occurs with new capital. Acknowledging that while investing into private markets has historically been perceived as difficult for DC pension funds, there are a number of ‘'enlightened investors” that have indeed figured out how DC schemes can include high impact investments in the private markets. Callum agreed that although the daily liquidity requirement for DC schemes has previously been a barrier for pensions to invest in venture, these have already been overcome in the industry. “There is no absolute barrier to illiquids for DC schemes,” he said, citing Nest as the most prominent example of schemes successfully implementing illiquids. “In general, the direction of travel in terms of regulations will be supportive for private markets,” he said. With a more supportive environment for trustees in this area, this will mean the opportunity to engage further with high impact investments. Paul shared the example of BGV’s recent acquisition by Connected Asset Management which will allow DC pension funds to do just that. He explained that by joining the Connected group, pension funds will now be able to access the high impact type of investment that tech for good can offer. He also added that it’s important to note that there’s no sacrificing returns from the point of view doing impact VC rather than non-impact VC.
Return to first principles but don’t reinvent the wheel
With regulation expected to increasingly support impact investing, and products coming on the market, engaging with impact now requires a mindset shift. Callum argued that “We can't expect to look at track record or peer comparisons because there's not a homogenous group of impact solutions, so we need to go back to first principles and ask what are the objectives we're looking to deliver financial, impact and otherwise?” Considering member views can be particularly helpful in guiding these objectives. Callum advised making the most of new technology and tools to gather insights from members, or to look at industry surveys from the likes of The Defined Contribution Investment Forum. Secondly, Callum said, adopting a robust framework is vital. “You don’t need to reinvent this, the Impact Investing Principles for Pensions already exists and we’ll be using this as consultants.” Charlotte explained that the Principles, put together by the Impact Investing Institute in partnership with Pensions for Purpose, were formed off the back of a legal paper that was trying to dispel some of these myths around the compatibility of fiduciary duty, impact investing and concessionary returns. The four principles provide a framework for framing an end goal when it comes to engaging with impact. “It's about empowering yourself to think about and ask the right questions up front,” she said, such as who takes on the costs and fees? “We've got a number of pension funds that have signed up, including South Yorkshire pension fund, and we're in close conversations with a number of others that are getting involved.”As impact investing grows in popularity, there is of course the danger of impact washing, as Paul pointed out. But using robust frameworks such as the Impact Investing Principles for Pensions can help mitigate that.
Growing supply and demand
While impact is on the rise, there’s still plenty of room for growth and for pension funds to play a part in stimulating both supply and demand. Callum explained that there’s a really important role for pension funds to engage with their investment platform, because not all investment platforms have impact solutions available yet. “I think trustees and governance committees can create the demand, collectively driving investment platforms to seek, qualify and add appropriate impact investment solutions to the rest of that field's breadth of choice.” From a supply perspective, Paul talked about the year on year increase of incredibly talented founders starting businesses that aim to deliver positive impact. “While you only need a little bit of money to start a startup, if it goes well then you need quite considerable amounts of capital to grow that company, and we see pension funds as an excellent source of capital for these ventures.”In response to a question from the audience as to whether private impact markets can absorb institutional levels of investment, Jamie responded that there is no doubt the sector can respond to demand. “We need institutions to not just dip their toe in the water, but to increase supply of capital and providers will expand their operations accordingly. It’s a virtuous circle.”Concluding the conversation, Jamie shared some numbers. “The Global Impact Investing Network puts the size of this market at about $700 billion. That might sound like a lot, but if total managed assets globally are $150 trillion, that's still only half a percent.” There is plenty of opportunity to grow, and with pension funds as one of the largest and most democratic sources of capital globally, they are perhaps the best placed investors to truly make an impact. To find out more about opportunities to invest in impact with BGV, get in touch with us here.