LGC interviews West Midlands’ Leanne Clements on how the fund seeks investments which have an economic impact as well as positive social and environmental outcomes in the UK.
RD: What is impact investing and where does it fit within the overall responsible investment agenda?
LC: Broadly, impact investments are defined as: “investments made with the intention to generate measurable social and environmental impact alongside a financial return.. However, putting that definition into practice varies depending on your fund’s investment beliefs and objectives. Within impact investing, a distinction is made between “financial first” and “impact first” investors. “Impact first” investors seek to optimise social or environmental returns while agreeing the minimum target financial returns (a financial ‘floor’) while “financial first” investors seek to optimise financial returns with a floor for social or environmental impact. Within that context, we would classify ourselves as “financial first” investors.
This diagram provided by Bridges Ventures demonstrates where impact investing fits within the overall responsible investment agenda and where capital can be allocated accordingly. As indicated on the diagram, the fund currently has investments in Bridges’ sustainable growth and property funds.
RD: How does impact investing fit within your investment beliefs and strategy?
LC: As institutional investors, we have a fiduciary duty to act in the best long-term interests of our employers and members. We believe that environmental, social, and corporate governance (ESG) issues can affect the performance of investment portfolios, to varying degrees across companies, sectors, regions, asset classes and over various timescales. The fund recognizes that environmental and social challenges can create attractive investment opportunities. As a result, active investing in this area is part of our overall responsible investment approach.
Our long term investment strategy includes three separate asset categories: quoted equities, fixed interest and alternative investments. Our impact investments currently sit without our alternative investment asset class, which has its own return target and whose key objective is to reduce dependence on the equity risk premium. It was with this overarching objective in mind that we sought opportunities within impact investing, and thus were not treated any differently than any other investment vehicle from a due diligence perspective.
For example, examining an opportunity within our indirect property portfolio, we looked at due diligence factors such as the degree of fit within the funds’ overall alternative investment strategy, sufficiency of resources and organisational back-up to implement the chosen investment style, capability of achieving suitable annual returns and in line with the target investment strategy, amongst other criteria.
RD: Can you tell us about the Investing 4 Growth initiative that you are involved in?
LC: The West Midlands Pension Fund is among five founding members of the Investing 4 Growth (I4G) initiative which aims to invest for financial returns and positive social and environmental impact. However, it is important to note that the participating funds are not reducing their risk-adjusted return requirements for these investments. The initiative offers asset managers the opportunity to develop impact investing strategies that pension funds and other investors are seeking, which will allow them to enter into or expand their activities in this market.
Asset managers were invited to put forward for consideration current or proposed investment opportunities that have appropriate risk and return characteristics suitable for the investment market (e.g., minimum return of 6%) and other robust due diligence criteria, including whether the underlying UK investments have a targeted positive economic impact on UK communities. Based on the findings of the due diligence process, a collective decision is made by the founding members as to whether the fund manager is included in the program.
The fund has made financial commitments to other impact investing opportunities over the years. However, as it relates to this initiative, the fund has recently committed £30m to a Bridges Ventures Property Fund, which I referenced earlier.
RD: What other collaborative investment opportunities are you currently involved in?
LC: This endeavour is just one of the innovative collaborative investment projects that the West Midlands Pension Fund is supporting. The fund is one of the founding members of the Pensions Infrastructure Platform (PIP) which facilitates investment in UK infrastructure projects. The fund has committed £50m to the PIP.
The fund has also announced a partnership with Finance Birmingham providing finance to small and medium enterprises (SMEs) in the West Midlands area. The fund will provide up to £40m of finance to a fund that Finance Birmingham is managing. The fund will be joining other regional investors and central government in providing funds to the project which will be accessible as loans to small and medium enterprises (SMEs). As with other impact investing opportunities, we believe that this investment partnership will meet its investment criteria but also will have the important element of supporting local projects, securing and creating jobs in the West Midlands.
About West Midlands Pension Fund: The West Midlands Pension Fund provides pension services to over 267,000 current and former employees of the seven West Midlands district councils and over 400 employers participating in the fund. It is one of the largest funds in England and Wales, employing 115 FTE members of staff and as at 31st March 2014 was valued at over £10bn. The West Midlands Pension Fund strives to be a best practice organisation, delivering a customer-focused service, while providing value for money to its stakeholders.
Leanne Clements is the responsible investments officer at West Midlands Pension Fund