The majority of pension funds view private equity as the best vehicle for achieving impact, suggesting untapped potential for asset managers, research by Pensions for Purpose has found.
The research, sponsored by Columbia Threadneedle Investments, sought views of 17 pension funds with a focus on defined contribution (DC), Local Government Pension Scheme (LGPS) funds and DC master trusts, and five investment consultants.
It found that less than half (43%) of pension funds surveyed by Pensions for Purpose were invested in impact private equity. However, 60% of respondents who do not invest in private equity impact investing said they see it as the best vehicle for delivering positive impact, suggesting there may be unmet potential within the sector.
The research also found that pension funds’ primary motive for impact private equity investment is to secure a more sustainable future which benefits their portfolios (33%). This is followed by the pursuit of a solid risk and return profile (25%), boosting member engagement (17%), moral imperatives (17%) and lastly, to align with the government’s ‘levelling up’ initiative (8%).
Pensions for Purpose said this “dispels the myth that impact investing necessitates a compromise on returns” and, in fact, “many pension funds have taken the view that impact investing has material financial benefits”.
It added that impact-focused pension fund allocations (67% of funds interviewed) screen the private equity fund’s impact first, when selecting managers, and that their expected market-rate returns remain undiminished.
The study also showed a trend towards locally oriented UK impact investing, with some DC master trusts pushing towards more domestic impact to help drive member engagement. This is also true for LGPS funds, given the government’s levelling-up agenda.
However, Pensions for Purpose warned pensions funds against a “narrow geographical focus” and encouraged the sector to maintain a global outlook by highlighting global issues such as the net zero transition.
It said that the schemes might be limiting their opportunities by focusing exclusively on UK impact investments.
LPs lack understanding
The report also explored the importance of ’additionality’, which showed a discrepancy in limited partners’ (LPs) understanding of the term.
Despite its significance, the research said that LPs lack understanding of the topic and the difficulties evidencing it meant that additionality was frequently treated as a less critical impact characteristic and consequently, most pension funds surveyed do not seek it.
As a result, Pensions for Purpose said additional education and understanding among pension trustees might be needed.
Karen Shackleton, chair and founder of Pensions for Purpose, said: “While our research clearly shows the majority of pension schemes – 60% – view private equity as the best vehicle for achieving impact, there’s still room for growth in understanding concepts like financial additionality.
“It’s important to recognise that pension schemes are primarily impact investing for financial reasons, but they are also increasingly focusing on UK impact.
“However, we advocate a global perspective on impact investment to meet crucial targets such as the net zero transition. Asset managers can be pivotal here, by creating innovative strategies that make impact private equity accessible for defined contribution (DC) schemes within their fee boundaries.”
Cameron Turner, research analyst for Pensions for Purpose, added: “Our study illustrates a shift in pension fund attitudes towards impact investing in private equity. It’s clear they view this approach not merely as a means to a financial end, but as a vehicle to drive a sustainable future.”
He noted, however, that “there’s a need for concepts like ‘additionality’ to be more widely understood, and for innovative strategies to accommodate DC schemes”.
Andrew Carnwath, director and head of impact, private equity, at Columbia Threadneedle Investments, said: “The study’s findings show the increasing potential of global impact private equity to deliver robust returns and drive positive impact.
“It is promising to see impact private equity emerging as a core component of investor portfolios, with pension funds looking for solid returns whilst making a positive contribution to society and the environment.”
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