How schemes are investing to make a real-world impact

Historically, most pension schemes viewed impact investing as delivering a good social or environmental outcome but not necessarily decent financial returns.

However, that mindset is changing as funds increasingly realise that investing to have a real-world impact does not mean they have to sacrifice investment gains.

Impact Investing Institute chief executive Sarah Gordon says there is a "growing understanding" among trustees, advisers and consultants.

"From our conversations across the industry, we know that many pension schemes want to reduce negative impacts and risks like carbon emissions, biodiversity loss, poor governance and inequality that arise from and impact their portfolio," she says.

"Even more encouragingly, the number of pension funds that are interested in investment opportunities that have positive impact and secure a competitive financial return is growing steadily and quickly."

Pension funds have realised they can drive solutions to issues such as climate change and the social impact of the coronavirus pandemic.

"[They] have an important role to play in supporting a transition to a net-zero carbon economy, which considers the consequences of that transition on people and communities and shapes a world that their members would want to retire into," says Gordon.

Professional Pensions' parent company Incisive Media will host its inaugural Sustainable Investment Festival on 22-25 June to help schemes, trustees and advisers navigate this rapidly-evolving area of the market. Click here for more information.

Real-world impact

While impact investment is not a term commonly used by most pension funds, it is increasingly being filtered into some schemes' mindsets and investment decisions.

This is an approach taken by RPMI Railpen, which looks at responsible investment through four different lenses, one of which is investing to have positive impact on the world into which beneficiaries will retire.

Senior investment manager Caroline Escott explains: "These are beliefs that define how we approach our investment work on the ESG integration side, but particularly thinking about the active ownership and engaging to achieve real-world outcomes. Quite a few investors have historically seen engagement about being very narrowly focused on just company performance producing shareholder value. But if you [take the] mindset that businesses can benefit all stakeholders and drive positive real-world outcomes, that actually drives a different conversation with the companies."

Railpen is finalising objectives for its targeted and collective engagements and is also looking at what those objectives mean in terms of real-world impact.

"We are focusing on the most material risks and asking for things that will achieve real change. That has been quite an interesting process because we had to extend our time horizons even more than we already do for specific objectives, as some of these things will take time," Escott says.

Another pension fund that considers impact through its ESG investment lens is NEST. Head of responsible investment Diandra Soobiah says: "We make a lot of impact from having a strong integration approach to ESG, identifying the risks in our investment approach but also tapping into those investment opportunities that have positive impact."

For example, NEST has been engaging with companies on the living wage for several years. The scheme is also targeting impacts through its climate change policy, which it developed last year to allocate a sizeable chunk of its portfolio to climate solutions.

"At the time, the fund managers were focused on the idea that these are great assets for the very long term, and then we got into a debate about the benefits these assets bring to communities and how they could be a strong potential solution to the climate crisis," says Soobiah.

As NEST invests more in climate, healthcare and social housing solutions, it is "thinking more about the framework for impact investment, how to capture the outcomes and measure them", she adds.

Pension schemes are looking at impact investing in various ways. Some have dedicated impact investment strategies, but others are looking to achieve ‘impact' through their existing portfolios.

ITS director Tegs Hardings says the trustee boards she sits on are looking at impact in two main ways: "One is in their asset allocation decision, for example, allocating a proportion of assets to renewable energy over other forms of private debt, which don't have the same impact on the environment but still delivers what the scheme needs in terms of risk, return and diversification from mainstream assets. The second is building impact considerations into the objectives for managers in segregated mandates." 

One of her schemes has asked their buy and maintain credit manager to identify debt securities that it believes will generate a total return and transition to a lower carbon world.

Measuring impact

The challenge with this way of investing is being able to measure the impact an investment has had beyond the financial return.

NEST is working with its fund managers on this and is also engaging with the Impact Investing Institute. "We have specific metrics in place for a lot of our portfolios but there are no consistent measurement standards and metrics yet," says Soobiah.

Impact accounting could help investors have a better idea of the impact of their investee companies. ITS's Harding says companies are starting to embed this as part of their ‘business as usual' operations, and she has seen two sponsors undertaking refinancing activity this year where ESG has been a major component.

"One example had a five-basis-point premium or discount, dependent upon the company's success at achieving three ESG-related performance indicators," Harding explains. "This is making it much easier to engage with sponsors on ESG and climate change and get it further up the agenda. Everyone wants to be able to point to progress even if that, from a company perspective, is as simple as taking steps to reduce scope three emissions by decarbonising the pension scheme assets."

Stephanie Baxter is a freelance journalist working at Rhotic Media

Sustainable Investment Festival, 22-25 June

Professional Pensions' parent company Incisive Media will host its inaugural Sustainable Investment Festival this summer, featuring keynote speakers, innovative breakout events and sessions to help schemes, trustees and advisers navigate this rapidly-evolving area of the market. Click here for more information.