Infrastructure: an investment ‘sweet spot’ for place-based impact

Impact investors like to talk about their global ambitions – ending hunger, fighting climate change, curing diseases, saving the rainforests. But investors can also make an impact closer to home. Indeed, the need to address regional inequalities through investing in local infrastructure is beginning to pique the interest of impact-focused investors.

Regional inequality, while not a new phenomenon, has attracted growing concern in many developed market countries over the past decade. In Japan, for example, rural areas are shrinking rapidly as young people abandon villages for jobs in Tokyo and other major cities. More than half the country’s municipalities are now classified by the Japanese government as ‘depopulated’.

In the US, meanwhile, wealth has become increasingly concentrated in the cities of the northeast and the west coast. The proportion of Americans living in metro areas with incomes 20 percent higher or lower than the national average grew from just 12 percent in 1980, to more than 30 percent in 2013, according to one Harvard University study.

Political pressure to combat these regional disparities has become harder for governments to ignore. The Trump administration introduced tax breaks for ‘opportunity zones’ in 2017, in an effort to spur investment in deprived areas of the US. In the UK, where the wealth divide between London and the rest of the country has widened as traditional industries have declined, ‘levelling-up’ has become a key priority for the government.

But there is a limit to the public funding available for new infrastructure that can stimulate regional economies. Private sector investment is needed to bridge the gap.

Multiplier effect

Advocates seeking to mobilise institutional capital to support ‘left-behind’ communities have developed the concept of ‘place-based impact investing’. This term was defined in an influential 2021 white paper produced by advisory firm The Good Economy alongside non-profit groups the Impact Investing Institute and Pensions for Purpose, as: “Investments made with the intention to yield appropriate risk-adjusted financial returns as well as positive local impact, with a focus on addressing the needs of specific places to enhance local economic resilience, prosperity and sustainable development.”

The white paper identified infrastructure as one of the five ‘pillars’ of place-based impact investing (alongside housing, SME finance, clean energy and regeneration). “Infrastructure is pretty crucial,” says Mark Hepworth, co-founder of The Good Economy and one of the authors of the white paper. “Because infrastructure generally defines in real terms what the ‘place’ in ‘place-based impact investing’ looks like.”

Infrastructure – particularly transport infrastructure – has long been recognised as having a crucial role in narrowing geographic disparities in wealth. Businesses are more likely to invest in deprived areas if they can easily reach their key markets; housing developments are made viable by better commuter connections.

“Infrastructure investments have a really powerful multiplier effect and play a critical role in supporting local communities and local economies,” says Mark Hall, programme manager in place-based impact investing at the Impact Investing Institute. 

Many of the projects included in the US Infrastructure Act passed by the Biden administration in 2021 are specifically designed to combat regional inequality. And in the UK, the HS2 high-speed railway, which will cut journey times between London, Birmingham and Manchester, is the government’s flagship levelling-up project.

Within London itself – a city characterised by massive inequalities – improved transport links have been crucial to the regeneration of several districts over the past 20 years. Jon Tabbush, senior researcher at think tank Centre for London, says that investment in light rail infrastructure around the site of the 2012 Olympic Park “facilitated the enormous regeneration of the area”.

Infrastructure requirements go beyond transport, however. Digital infrastructure is also at the forefront of place-based impact investing. Peter Bachmann, managing director for sustainable infrastructure at Gresham House, cites his firm’s investment in Wildanet, a company providing rural broadband in southwest England. Gresham House commissioned a study to quantify the impact, which Bachmann says found that the £50 million ($60 million; €56 million) investment had produced £600 million in local economic benefits.

These kinds of place-based investments can also be a good fit for a traditional infrastructure investment strategy. “Ultimately, what we are trying to create are large, long-term, enduring assets that derive quite a lot of their value from their location in some respect,” says Bachmann. 

Local money, local investment?

If place-based impact investing is to truly gain traction, one of the vital ingredients will involve directing a greater share of institutional capital – notably from public pension funds – towards the regions where it originated.

However, public pension funds appear to be generally moving in the opposite direction. The OECD reports that the proportion of pension assets invested abroad has increased in 32 out of its 38 member jurisdictions over the past 10 years. Although public pension funds have also increased their exposure to infrastructure over this time, this trend does not necessarily translate into investing in local infrastructure.

The place-based impact investing white paper found that very few of the UK’s 98 Local Government Pension Schemes have indicated an intention to make place-based investments. Only around 1 percent of total LGPS assets are invested within the UK in sectors relevant to place-based investing, The Good Economy found.

The white paper noted that if every LGPS allocated 5 percent of its assets to place-based impact investing, £16 billion would be available for local areas – far exceeding the capital available from the government’s £4.8 billion Levelling Up Fund. The logic of requiring LGPS to allocate at least a small share of their AUM to their local areas is hard to dispute in principle. As Hepworth asks: “How are you going to level-up Britain, if you are not going to somehow mobilise at least some of the institutional capital in the country?”

But LGPS managers have not been in a rush to change course. So far, only the Greater Manchester Pension Fund has adopted the 5 percent place-based investing commitment.

Geographic focus

By definition, one of the key aspects of place-based impact investing is that investors must set out to generate social and environmental benefits within a specific place. “There has to be intentionality,” insists Hepworth. “We have got to have evidence that this is intentional and not some side effect of your normal business operations.”

But the focus of bringing tangible benefits to specific, pre-defined areas does not necessarily fit in seamlessly with the preferred strategies of infrastructure fund managers. “If you try to invest solely into a region for a particular reason, and you ignore other places that perhaps might be better for various other reasons, that may create difficulties,” says Bachmann. He warns that investors need to focus on finding the optimal locations to establish particular assets, rather than the other way around.

“Where we have seen this get unstuck is in the past where you have had very locally driven investments, that may ultimately create the situation where you invest into something that is suboptimal,” he says.

Scaling-up?

Gresham House manages a sustainable infrastructure fund with a mandate to invest in assets across Britain. Having a relatively broad geographical mandate makes it easier for fund managers to find assets with appropriate characteristics to deliver both impact and returns.

However, small-scale infrastructure projects designed to benefit specific areas are less likely to be attractive to fund managers with a broader mandate. Investing time and effort in striking deals with small ticket sizes is unlikely to make financial sense.

This issue of scale “definitely is a challenge”, says Hall. LGPS managers will mostly need to rely on direct investments if they want to boost infrastructure in their specific localities. But, as Hall notes, only the larger public pension funds are likely to have the resources and expertise to make direct investments in local infrastructure.

Pooling is also a tool that can facilitate LGPS investment into larger, regional infrastructure schemes. As Tabbush notes, pooling pension fund assets “reduces the risk of each individual fund and allows for much larger projects”.

The London Pensions Fund Authority and the Greater Manchester Pension Fund joined forces in 2016 to create GLIL Infrastructure, a fund mandated to invest in UK infrastructure. GLIL has since invested in 14 assets. Few of these investments, which include stakes in offshore wind farms and a railway operating company, could be described as ‘place-based’, however.

Another challenge is that investors in place-based projects will need to work closely with local governments. Yet capacity at the local government level in the UK is widely acknowledged to be seriously constrained. “Half the battle is getting the elephants to dance,” says Hepworth. “Local government itself is a bottleneck… their ability to innovate, their ability to take on new things is seriously restricted.”

Nevertheless, in spite of the major obstacles that lie in the way, advocates of place-based impact investing remain cautiously optimistic about the future. Indeed, few would deny that infrastructure has a key role to play in revitalising left-behind areas. “There is a huge need and demand for this kind of investment,” says Hall. “It is a market that has got a lot of potential for growth.”