Octopus Investments (Octopus), an investment manager on a mission to invest in the people, ideas and industries that will change the world, in partnership with the research division of mallowstreet, a community for the institutional investment industry, have today published new research on the role of social infrastructure in Local Government Pension Schemes (LGPS) portfolios.
The research was carried out among 27 UK LGPS schemes who were surveyed in April 2024, gathering perspectives on more than £230bn in assets under management.
The survey found that LGPS schemes already invest in themes which are associated with positive impact. Almost all (96%) of the schemes invest in clean or renewable energy, while 64% invest in sustainable infrastructure. Additionally, 60% have allocations in both affordable housing and healthcare, and a fairly substantial 40% in natural capital, which, given its nascency, is higher than expected.
More specifically, 63% of LGPS schemes consider affordable housing (including mid-market rent, shared ownership and social housing) as the most important area for social impact. An additional 41% see a need for social impact via community and urban regeneration, while 22% see healthcare (including retirement communities, care homes and specialist care) as a key area.
When asked why they are investing in social infrastructure, 74% do so due to its risk-return profile and diversification benefits. As for the top concern, the potential clash with fiduciary duty if impact is being specifically targeted was the most common answer. 48% of all schemes flagged this as a concern, despite the fact that one of the main benefits attracting 22% of LGPS asset owners to social infrastructure are higher investment returns. It is possible that this clash is more of a perception, as we are increasingly seeing that creating impact and delivering strong returns to investors are not mutually exclusive.
Encouragingly, given the long-term mindset of most LGPS, just 22% worry about illiquidity and/or gating risks when investing in social infrastructure. Similarly low proportions worry about the lack of transparency around asset valuations, or political, election or re-election risk when dealing with local authorities.
When it comes to measuring impact, the LGPS community have high expectations on reporting levels. 70% of LGPS investors would enquire about the assets under management (AUM) invested specifically with an impact goal, while around half (48%) would want to know about the volume and magnitude of the impact their investments create. Larger LGPS pools and schemes over £5bn have even more detailed reporting requirements: 62% would ask for a breakdown of the AUM invested in each region (e.g. North vs South of England), likely reflecting a desire to create – and see – a real impact on local communities.
Environmental metrics are equally as important. Carbon and GHG footprints are in demand for nearly all schemes (96%) irrespective of their size, as are net zero targets which factor in both embodied and operational carbon. However, whole life carbon metrics are used more rarely (by only 36%).
Lastly, when LGPS investors were asked what their ideal qualities in social infrastructure managers would be, alignment with one or multiple sustainable development goals and established impact principles, e.g., those provided by the Global Impact Investing Network (GIIN) or the Institutional Investors Group on Climate Change (IIGCC) were voted the top two (by 73% of all schemes). The same percentage of investors also thought that the ideal manager would be a signatory and provide disclosures in line with established climate standards and frameworks.
Jack Burnham, Head of Affordable Housing at Octopus said:
“It is great to see 63% of LGPS selecting affordable housing as the most important area for social impact. However, aside from the impact, the sector offers resilient, risk-adjusted financial returns too. In general, affordable housing has low correlation to other property markets and the wider economy.
“Our strategy is targeted to offer steady income, supported by government-backed inflation-linked revenues, and long-term capital growth. We understand that fiduciary duty is a key consideration for LGPS when investing and that the need for social impact must be balanced with the requirement for fair financial returns.”
Mike Toft, Head of Care Homes at Octopus said:
“While healthcare is not currently the highest on the list for LGPS investors we expect this to be a growing area of interest when it comes to social impact investing. This is due to the increasingly large shortfall in quality elderly care beds and demographic trends forecast to exacerbate this further. Addressing this societal need will also reduce bed blocking pressures on the NHS, in turn, supporting the wider healthcare ecosystem.
“In terms of the data on reporting, 62% of LGPS schemes over £5bn require a metric around the number of new beds. This is something that is really important for us with the Octopus Healthcare Fund in measuring our success, so it is great to be aligned on this. We’ve provided over 6,000 quality care beds into the UK and have over 1,000 more in the pipeline.”
Ally Georgieva, Head of Insight at mallowstreet said:
“The shortage of homes in the UK, whether that’s care homes or affordable homes, continues to be a problem which is unlikely to be solved by government funding alone. The investment gap still looms large, so it is encouraging to see support for collaboration between asset owners and managers, in efforts to come up with viable solutions that can benefit all stakeholders. It was a pleasure to partner with Octopus Investments on researching this important topic.”
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