UK muni pensions target renewable infrastructure
More local government pension schemes in England and Wales are targeting renewable infrastructure investments to tackle the environmental and social challenges facing the UK and meet a government proposal to invest at a local level.
Bedfordshire Pension Fund and Staffordshire Pension Fund have invested a combined £80m into the British Sustainable Infrastructure Fund II run by alternative asset manager Gresham House, which operates projects in their areas.
Infrastructure is seen as an attractive asset class for LGPS as it offers stable long-term returns and a hedge against inflation, while supporting environmental aims such as decarbonisation and biodiversity, and social goals like the UK government’s "levelling up" agenda to reduce regional inequality, as well as job creation.
“Local authority pension schemes are quite attracted to infrastructure, particularly because of the returns, but also what we’re doing – they love the impact,” said Peter Bachmann, managing director of sustainable infrastructure at Gresham House.
“A lot of them are thinking about their levelling-up agenda. For most of them, levelling up means investing in the UK – if you want to do levelling up, you have to do something place-based. For example, the bulk of our portfolio is outside London.”
Gresham House is a specialist asset manager with £7.8bn under management at the end of 2022, including forestry, renewable energy and battery storage projects. Searchlight Capital Partners agreed in mid-July to buy Gresham House for £469.8m.
UK-based renewable energy investor Octopus Energy Generation welcomed Wandsworth's pension scheme as a cornerstone investor in its energy transition fund in May. It launched its Sky fund in March 2021 with a £250m cornerstone investment from the National Employment Savings Trust, a defined contribution workplace pension scheme.
Next steps
More LGPS are expected to follow as the government adjusts the rules for investing after publishing a “Next steps on investments” consultation paper on July 11. The consultation aims to increase investment in high-growth companies via unlisted equity, including venture capital and growth equity, and also requires funds to invest up to 5% of assets to support levelling up.
The LGPS is one of the world’s largest funded pension schemes with a market value of around £364bn from 86 councils. Around £27bn had been invested in infrastructure in the UK and overseas by March 2022, but this is expected to increase rapidly.
More UK local authorities are developing new funds, portfolios and projects to support energy transition. Durham County Council's pension fund made an £18m cornerstone investment in June 2022 in the Foresight North East Fund, with Teesside's pension fund also investing. A second close of the Foresight fund in April followed a £20m investment from British Business Investments, a subsidiary of British Business Bank.
It will back SMEs across the North East, Yorkshire and North Lincolnshire and is the fourth of five regional private equity funds run by investment manager Foresight Group. Other managers such as Greencoat Capital and Bridges Fund Management are also raising capital from LGPS to invest in renewable infrastructure.
Local angle
Projects with a local angle and prospects for job creation are compelling investments for LGPS and could help to plug some of the funding gap that the UK is facing to meet its net-zero ambition by 2050, as prime minister Rishi Sunak waters down support for environmental policies.
"In the last year, the UK has not done itself many favours with political instability and quite a lot of overseas capital has left the UK or been less interested in the UK. I think there are pockets of leadership still in the UK and I think that we've got to continue to find and develop opportunities to tap into that," Bachmann said.
Gresham House’s British Sustainable Infrastructure Fund II totals more than £400m with commitments from seven LGPS and is expected to close by the end of the third quarter, bringing the total number of LGPS across the two strategies to 10, Bachmann said.
The fund has an impact investment approach and focuses on environmental infrastructure, including vertical farming in Staffordshire, and social projects such as rolling out fast broadband to rural communities.
"We view this allocation as complementary to our core infrastructure exposure and allows us to meet our commitment to place-based impact investment here in the UK,” said councillor Mike Sutherland, chair of Staffordshire Pension Committee.