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21 March, 2022 / Opinion

What is place-based impact investing?

By Lydia Merry, manager, real estate capital, Schroders

Schroders' Lydia Merry explains how it can help real estate investors deliver clear and measurable improvements to deprived areas

What is place-based impact investing?

The UK government’s levelling up agenda aims to create greater equality across the UK by devolving decision-making to local governments.

The plan seeks to mobilise investment into projects that respond to local needs by offering increased employment opportunities, affordable housing and revitalised, empowered communities. However, the plan will only succeed if private and public sectors work together.

The government recently released its long-anticipated plan outlining how it expects to deliver on these ambitions. One of the key suggestions is for local government pension schemes – of which only a small fraction is invested directly in the UK – to allocate 5% of their investments to local projects. The response was mixed.

However, institutional capital sources such as defined contribution (DC) pension schemes are progressively allocating larger sums to impact investments. Furthermore, developments in impact offerings are providing more options to investors looking for ways to – literally – build change.

Place-based impact investing (PBII) is one part of that growing range of strategies that support investors seeking to deliver positive social or environmental outcomes as a direct result of their investment.

How to build change with place-based investment

Covid-19 has exacerbated and highlighted deprivation and social inequality. Those on zero-hours contracts or lower-income jobs have been disproportionately affected by multiple lockdowns and economic pressures.

The UK’s outwardly prosperous cities and regions – like London and Manchester – often harbour extreme poverty and social deprivation within. It is an inconvenient truth that some of the fastest growing cities in the UK are also amongst the most unequal.

Historically, there has been a perceived conflict between fiduciary duty and sustainable – or impact – investing. The conflict stemmed from the belief that socially beneficial and financially prudent investments are drawn from the same, finite, pot. But perspectives have evolved.

The concept of ‘value’ itself is evolving. The understanding of value has moved beyond short-term financial returns towards an holistic view of benefit. Even two years ago, specifically tackling societal issues as part of the investment strategy was unusual, but increasing demands by beneficiaries and policyholders have led to increased focus on how real estate can deliver tangible solutions to social deprivation. This has led to the inclusion of positive impact in mainstream strategies.

PBII is the act of developing real estate assets with a set of defined social and environmental objectives. Indeed, environmental and social goals are often mutually beneficial; a focus on one can frequently improve the other. PBII schemes can be complex, with long gestation periods, so investors in them require a long-term view. Even so, we believe this type of investment strategy creates assets that are both defensive and can drive enhanced long-term financial returns, while making a real difference.

In the case of office space, our research has shown that tenants prefer modern and sustainable buildings, and that the ‘right’ office space is an increasingly valuable tool in the war for the best talent. Attracting this talent can also bring a powerful multiplier effect to a local economy, radiating outward.

To address the UK’s chronic housing crisis, a clear priority should be given to investment in high-quality, energy-efficient, affordable homes. These homes should be in accessible locations that do not require residents to rely on private vehicle access.

The traditional bricks and mortar high street remains challenged, as retail relies less on shelf space and more on a balance of e-commerce, efficient logistics and warehousing. Creating town centres that combine retail, housing, healthcare, community spaces and improved public realm can create a positive spiral and attract greater prosperity to a city or region.

Increased employment through mixed-use schemes or the provision of workspaces in the private sector, with discounted or zero rent for start-ups, would also support enhanced local economies which, ultimately will lead to longer-term, sustainable income from the asset base. As the economic outlook in these regions improves, a wider variety and volume of high-quality tenants will be attracted which in turn will drive rents, boost liquidity and stimulate institutional demand for investment property to deliver positive financial returns for investors too.

Living, breathing cities

Viewing an investment as a living, breathing part of a city is critical for the success of PBII. Investors should collaborate with local councils, local government pension schemes, businesses, third-sector organisations and crucially, communities. Indeed, responding to identified local needs and priorities associated with a specific place is a critical requirement to enhance local economic resilience and prosperity. Regeneration and other real estate solutions must respond to the needs of local communities rather than force schemes upon them.

PBII sounds very worthy – but as institutional capital has historically focused on data as a measurement of success, how does this translate to impact strategies?

It is critical for investment managers to be able to measure the contribution that has been created through their investments. Additionality is key – we want to deliver opportunities that would not have otherwise happened. We screen assets using a proprietary “impact scorecard” which sets ten geospatial data and property-led tests which seek to capture the level of impact created through investment.

Each asset will have clearly defined targets to be achieved throughout its asset management strategy. It might be square meterage of affordable workplaces or community spaces, number of apprenticeships supported, number of families accommodated in affordable housing or long-term NHS beds freed up. These metrics will vary depending on the property type but progress against specific metrics will be assessed and reported an annual basis by an external specialist consultant.

Intent, contribution and measurement

Through the key factors of ‘intent, contribution and measurement’, the positive social and environmental impact delivered has the greatest breadth and longevity. Collaboration in the public and private sectors combined with close engagement with communities and local charities should support the mobilisation of institutional capital into PBII. Ultimately, this should drive positive social and sustainability outcomes for individuals and families and all other stakeholders in the UK’s most deprived areas.

Part of the Bonhill Group.