Pensions funds might not seem like obvious impact investors, but we are seeing them commit larger and larger amounts to targeted impact. Really, it makes perfect sense – these big picture players are taking action now for the long term.
The trend is clear, sustainable investments generally, in this case impact investments specifically, are all the hype these days. With a year-on-year AUM growth of 42%, it is clear that more investors are opening their eyes and investment strategies to the field of impact investing. One category of investor who has really stepped up to the plate is pension funds, as exemplified by Swedish pension funds Alecta and AFA’s recent investment in a USD 177 million social bond, or the Swiss Post pension fund that increased their microfinance mandate with responsAbility to USD 350 million in 2019.
What motivates more and more pension funds to invest in impact? With a fiduciary duty to protect the retirement funds of their members, you might believe that they are less willing or able to do such investments than a foundation or a family office would be. Quite the contrary – a lot of pension funds see the fundamentals of impact investing as a very good match with their own fiduciary mandate. A pension fund manages assets for the long run, with an eye to protect assets and generate return for an employee who is only planning to retire and tap into her pension in 30 or 40 years. Impact investors are also big picture players, seeing opportunities to address the big issues faced by our global community that can only be addressed with decades of commitment, for instance sustainable food production or climate change. Therefore, long-term investors, such as pension funds, are the perfect partners for these big-picture investments, and more concretely, here are the top three reasons why:
1. Mitigating Risk: global challenges coming to an economy near you
Covid-19 has been yet another example of local challenges quickly become global — other examples include refugees fleeing war and local emissions leading to global climate change. This means that investors in the developed world stand to benefit from addressing such issues, even if they haven’t spread globally yet – preventative care, if you will, but for the investment sphere and for the planet.
Take the case of increasingly exhausted production of food in emerging markets. If left unaddressed, it will contribute even more to climate change: agriculture is one of the main contributors to global emissions, often because of inefficient, unnecessarily resource-intensive production. On top of that, this fosters a decline in arable land and stagnating food supply, which leads to land conflicts, famines and subsequent regional and global mass migrations. Outside of immediate and unnecessary human suffering, this also creates pressure on public finances and overall economic growth across the globe, including of course where our pension fund investors are based.
“It’s clear that if you’re a pension fund with an extremely long-term lens on how to create value for your customers, then you have to think a lot about sustainability.”
– Swedish pension fund Alecta’s CEO Magnus Billing
2. Financial Opportunity: solving the big challenges can mean big returns
Another argument for a pension fund focusing on long-term, risk-adjusted returns lies in the fact that impact investing addresses global sustainability challenges, which are not only risk-mitigating as shown above, but also create an economic upside for investors. This is because the challenges relating to sustainable development are often connected to severe imbalances in supply and demand, which means that companies that are able to bridge that gap often have an excellent business case.
Let’s get back to the example of food – in many developing countries, the fundamental food challenge is that the demand is growing fast due to population and income growth, while the supply is limited due to limited land capacity, centuries of depletive, unsustainable agriculture, suboptimal production methods and inefficient supply chains. Companies like Suminter that address these challenges, are showing to be very interesting investment cases both in terms of impact and financial returns. Suminter addresses the supply-demand gap by teaching farmers how to use modern, sustainable (in this case organic) methods to produce higher yields at a higher quality, allowing for increased food supply, higher income for farmers, and less stress on the soil. Suminter, then, is not only doing the right thing, but also the smart thing by capitalizing on the unmet demand for more, sustainable food.
3. Diversification: Putting some eggs in a different basket
A third element of impact investing is that a lot of managers, responsAbility included, focus on sectors and geographies that most “plain-vanilla” asset managers do not, offering pension funds with large balance sheets a focus on risk mitigation and an attractive diversification opportunity. I asked the CFO of one of the pension funds invested in our sustainable food private equity strategy what the key drivers behind her investment decision were, and she told me that the impact was secondary to the fact that the strategy offered her exposure to an asset class (growth PE), a sector (the food and agriculture value chain) and a geographic region (South and Southeast Asia) that gave her portfolio diversification across the board. Add the fact that if a pension fund sees an economic downturn in their home market, they can be hit both with a depreciation in their local financial assets and reduced income (through fewer employees paying in less pension overall), and then you can understand why diversification is key for many of them. An investment that is both physically and financially further from their other assets can thus be an attractive element in their portfolio.
Mitigating future risk scenarios, seeing opportunities in global challenges and diversifying the portfolio are some of the key drivers for why an increasing number of pension funds are investing in impact. Or put differently – a long-term fiduciary mandate means that pension funds and impact investors make a good match: they both see the big picture and choose to act now for a better future.
Balder Vestad is Head of responsAbility Nordics, leading the company’s business development activities in the region. Previously, he worked as a corporate banker at DNB Bank, and has an MSc. in Economic History and Development Studies from the London School of Economics (LSE). He has lived in 8 countries on 4 continents and thus, not surprisingly, enjoys travelling.