UK pension funds investing in impact funds have successfully aligned financial returns with positive social and environmental outcomes, according to research from Pensions for Purpose.

This dispels the myth that impact investments necessitate a trade-off with financial returns, a significant revelation for trustees across the UK who may have had concerns their fiduciary duty is a bar to investing in positive impact investments.

The research, compiling data from 17 asset managers managing £18.6bn in impact assets, demonstrated how impact funds across listed equity, bonds, private equity, real estate and infrastructure have delivered competitive returns compared with traditional investments.

Additionally, the research team interviewed six UK pension funds and four investment consultants for qualitative analysis to supplement performance data findings.

These impact investments had predominant themes of renewable energy (56.4%), energy efficiency (49.1%) and health (40%), aligning closely with the Principles for Responsible Investment (PRI) Impact Investing Market Map.

Notably, biodiversity is emerging as an important area of interest, which Pensions for Purpose said indicates a broadening scope of impact investing among UK pension funds, moving beyond traditional environmental concerns.

According to the research, impact investments in private markets where impact additionality is achieved, particularly in real estate and private equity, represent a substantial portion of pension funds’ allocations, highlighting a strategic inclination towards these asset classes.

Private market investments form a significant amount of pension funds’ impact strategies, accounting for 47.3% of the total number of funds, while listed assets comprise 52.7% of the investment options provided by managers offering impact solutions to UK pension fund investors.

The research also showed that funds already allocating resources to impact investment have committed between 1% and 25% of their portfolios to such solutions.

In addition, the majority maintain a long-term outlook, spanning 10 to 30 years, with expectations for these investments meeting both financial and impact goals.

Asset owners with a more extended history in impact investing reported satisfaction with their returns, while those with shorter investment durations presented a more varied response, acknowledging the need for a full market cycle to fully assess performance.

Karen Shackleton, chair and founder of Pension for Purpose, said: “The findings of our research are important for the pension fund, impact and general investment industries.”

She added that the findings validate the compatibility of impact investing with financial performance goals which could have far-reaching consequences on future institutional investments.

“This research paper also serves as a valuable resource for pension funds contemplating impact investing strategies and shows the potential of these investments to contribute positively to society and the environment while meeting fiduciary obligations,” she said.

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