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In March this year, the London Pension Funds Authority, a £7.7 billion Local Government Pension Scheme ('LGPS') Fund, published its first Investing in the UK Report, a collaboration with The Good Economy and the Local Pensions Partnership Investments.
It’s an interesting document, as it speaks to an increasing trend within the institutional investment world to re-orientate their focus around the 'S' of the Environmental, Social and Governance movement ('ESG'). A good working definition of what this means is contained in a recent report by the Department for Work and Pensions, “Social factors are considerations about an investment that relate to people – from workers and suppliers to customers and communities ”. This is somewhat of a step change in the ESG movement which has previously focused on the environment, carbon reduction, and the drive to Net Zero.
This led to a huge drive from institutional investors, as a result of political pressure and regulatory change, to document and disclose their climate risk and Net Zero plans. These disclosures have become increasingly sophisticated. As they have evolved from ESG reports into sustainability reports they have picked up a much bigger focus on social value: on how these investments – and particularly infrastructure and regeneration projects - that we have within our collective portfolios work for the communities in which they are located. This is a welcome trend. The finance industry needs to explain our relevance to local communities much better. Unfortunately, many – most – institutional investors talk at a high level about their portfolio size, overall investment split, and the credit ratings of their investments.
This is of course important, but some are now seeing the need to take a more granular approach, explaining in more detail how and where they are investing across the UK. We were pleased to publish our own report, The social and economic value of finance in December last year, in conjunction with capital markets think tank New Financial, which shows the footprint of our investments and policyholder payments across the UK and the real-world impact of these investments on the economy. The term social value, of course, is yet to be fully defined, and there is considerable work to do to evidence and assess the extent to which these investments create it. However, when talking to trustees and our policyholders, it is clear that they see considerable value in this work, helping them understand how assets are invested responsibly and have a net positive social impact. So it is likely that this trend will be led by life insurers such as PIC as we take on increasing amounts of defined benefit pension liabilities, and by the LGPS, building off the report published in March. By helping to engage trustees and other stakeholders on the real-world impact of long-term investments in infrastructure and regeneration projects providing the cashflows to back pensions stretching decades into the future, we hope to continue to help drive innovation, understanding, and progress in reorienting the sustainability movement onto the people at the end of the investment process.
