Pensions World

Impact investments are set to explode over the next decade explains Anthony Hilton, Evening Standard

One of the oldest divisions in investment is between money put into a project to generate a financial return and money put into a project to create a social benefit. They are considered the opposite ends of the spectrum.

But in the first analysis by a mainstream investment bank into the investment opportunities of what it calls impact investments – defined as investments seeking to create a positive impact beyond that of a simple financial return – JPMorgan suggests it is no longer – if it ever was – a choice between the extremes. It highlights a growing tendency for people to make investments designed to yield both a social benefit and a financial return and goes so far as to say these deserve to be treated as a separate asset class.

Its definition of these impact investments is that they should be targeted at the lowest income groups – those “who make up the broad base of the economic pyramid” which is defined as people with an income in 2002 money of $3000 (£2000) a year or less.

The bank thinks that over the next decade or so this investment category will explode in size. Across the sectors it looks at in detail – the basics of agriculture, water, housing, education, health, energy and financial services (especially microfinance) – it estimates a profit over the decade ranging from $183bn to $667bn.

Invested capital could range from $400bn to nearly $1 trillion. And while most investments may still be in the traditional form of debt or equity, there is scope for more innovative structures such as the Social Impact Bonds used in this country where the returns are linked to metrics of social performance such as prisoner reoffending rates.

Better returns

But there is scope for pension schemes to do much more and at the same time to make better returns than they do from their current range of investments. For some months now, Redington has been pushing the idea of investing in social housing.

Social housing is accommodation built for the most part by housing associations to provide accommodation for low income families who cannot afford market level rents or to buy their own home. This accounts for some 8% of the UK housing stock or 2.5m homes. And while there are about 1,700 housing associations in the UK, a few big associations dominate the business: 90% of the available units are owned by just 19% of the associations.

The associations can produce houses cheaper than the private sector can because they are subsidised. In the past few years they have raised almost £50bn in long term loans – mainly from banks – and have received a further £37bn in local authority grants of one kind and another. Local authority funding is of course currently under pressure but the real challenge in current conditions has been the changed attitude of the banks who are no longer prepared to offer 25 year money at just a few points over Libor.

An idea whose time has come

This is where the pension schemes could step in – as potential buyers of inflation linked long term bonds issued by the housing associations. These bonds would replace the missing bank loans to fund the construction of homes and their income would be secured on the rental income of the accommodation. Ironically this is much more secure than private sector rental income because so much of it comes from local authorities in the form of housing benefit and is paid direct to the association. And because the housing offers such good value, tenants stay.

Rent increases are linked to the Retail Prices Index which means that the housing associations have the financial capacity to pay inflation linked returns on their bonds. They get the funding they need while the pension scheme gets the higher yielding long term inflation linked asset it needs.
This is an idea whose time has come. Pension scheme trustees badly need investment strategies which are more imaginative than the mindless purchase of government debt – and with the added advantage that it should yield enough to pay the bills.

Anthony Hilton is financial editor, Evening Standard; anthony.hilton@standard.co.uk