Economically Targeted Investment

It looks like ideas move fast with this government. The Conservative Party conference, just a month ago, was a really stimulating experience. The transformation over 12 months was probably most evidenced by the ResPublica phenomenon. Coming from almost nowhere last year, Philip Blond’s (pictured) think-tank is now one of the most innovative and is central to the Big Society and localism policies pouring out of Government.

ResPublica hosted the launch of the Core Cities pitch for more freedoms and more cash. The debate that followed highlighted the financial innovation likely to follow both the proposed new general power of competence for local authorities and the innovative outpourings from Government including the New Homes Bonus, the Business Incentive Bonus, Housing Revenue Account changes, place-based budgeting, municipal bonds and tax increment financing to name but a few.

The money may have reduced, but the funding complexity hasn’t. The need, opportunity and ability to innovate is substantially greater now than ever before.

One interesting proposition was around the opportunity for localised equity investment. In the U.S., public sector pension funds have recognised the opportunity for investing in under served markets (primarily SME venture capital, urban regeneration and affordable housing). One of the U.S. market leaders, CALPERS in California, has made some startlingly high returns from directly investing in places the mainstream (some would say blinkered), global, fee driven and index following fund managers have missed. Generally in the fund’s own back yard.

They call this Economically Targeted Investment and generally commit a fixed portion of their funds to it.

In the UK, the Greater Manchester pension fund seems to be something of a leader in this area having invested many years ago in the Greater Manchester Property Venture Fund, and now backing the proposed new JESSICA-led fund.

The discussion brought to mind the transformation in Sustainable Investment over the last few years. When igloo was formed in 2001, pension fund trustees regarded it as a breach of their fiduciary duty to invest in anything that smacked of social responsibility. When Freshfields published their landmark opinion with the United Nations Environment Programme Finance Initiative (UNEPFI) that it was a breach of fiduciary duty not to consider environmental, social and governance issues because of the risks they posed, the market transformed incredibly quickly.

In current Conservative Party thinking this was a classic nudge policy.  In the context of Big Society and local authority pension funds’ wide (but usually narrowly interpreted) responsibility to their (predominantly local) members it will be interesting to see how this conversation develops. I suspect a lot of members would love their pension savings to be invested in their own back yards in things that are good for society (and therefore for them), such as affordable housing, environmental retrofit, urban regeneration, small and medium private and social enterprises through direct and indirect investment in venture capital, tax increment financing and JESSICA vehicles and municipal bonds. Particularly if these investments, though overlooked by the global fund managers, turn out to drive good and secure returns.

So it was great today to see it being advocated by Government here. Talk is cheap and when you have no money as a government change is hard to achieve. This policy will be an interesting test case.

2 Responses

  1. Good stuff Chris, but there is a strong element of ‘any port in a storm’ about the approach to initiatives of this kind, when they should have been much higher on the agenda years ago.

    Will either the private or public sectors have the will, wit and skills to engage effectively with mechanisms of the type you’re outlining here?

  2. It struck me today, maybe naively, that with the banks looking to cut back bonuses from £7 billion to £4 billion, that potentially there is £3 billion floating around that could be used for Economically Targeted Investment. Imagine the ‘goodwill’ this could generate, let alone the economic benefits to all involved.
    Rather than always looking to the state for regeneration funding, let us, the regeneration profession, have a positive and creative dialogue with the financial institutions.
    In this current environment, the banks could only gain from doing more to regenerate our communities and we could help them do it.

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