Schroders launches climate impact fund for the UK’s first LTAF

Climate+, a long-term asset fund aimed at DC pensions, will invest across private markets.

The UK’s first Long Term Asset Fund is a climate-focused impact fund managed by Schroders Capital.

Climate+ will be invested across private asset classes including private equity, infrastructure, real estate, private credit and natural capital. It is classified as an “impact fund” under the UK’s Sustainable Disclosure Regime, addressing themes such as climate change mitigation, climate resilience, biodiversity protection and just transition.

The fund is an open-end vehicle; Schroders has not disclosed any long-term or near-term fundraising targets. The fund will be invested directly and via third-party funds.

Schroders is marketing the fund to UK defined contribution pension funds using the UK’s LTAF structure, which was introduced to allow DC pensions and retail investors to invest in illiquid assets. Schroders has no current plans to market the fund to private wealth managers or individual investors.

Its cornerstone investor is Cushon, a £1.8 billion ($2.2 billion; €2.1 billion) AUM private pensions trust that has a target allocation of 15 percent of its managed assets to Climate+. Cushon will be ratcheting up investments to Climate+ from its default fund annually to meet this target.

Schroders is aiming to deliver net returns of between 8 and 10 percent. It charges management fees of 1.25 percent and will not claim carried interest or performance-related fees.

Opening the door

The LTAF structure was introduced by the UK’s Financial Conduct Authority in 2021 as a way of increasing DC pension funds’ and individual investors’ access to private markets. It mirrors the EU’s European Long-Term Investment Fund structure, which was launched in 2015 and gives professional and retail investors access to private assets at a €10,000 minimum ticket size. ELTIFs also typically charge lower fees than private markets funds marketed at other institutions.

DC pension funds are required to cap fees at 0.75 percent across the portfolio – which means the typical two-and-20 model for management and performance fees is a barrier for them investing in private funds.

Cushon is looking for private equity exposure to achieve “additional returns for members”, said Danny Meehan, proposition director at the pension trust. “There’s an awful lot of the value chain that’s being captured [in private markets] that DC members haven’t been able to benefit from.”

A climate impact fund may seem like an unusual choice for Schroders’ first LTAF. Earlier this year, the firm launched its first ELTIF; as a generalist private equity fund, it is a more straightforward strategy. There were 84 ELTIFs registered in the EU in January, affiliate title Private Equity International reported earlier this year. New Private Markets’ research has uncovered that twelve of these that are climate or impact funds.

For Cushon, impact and climate investing is an easier sell for pension fund members than generalist private equity. “We want [members] to be proud of their pensions,” Meehan said. Cushon plans to “pivot away from messages [such as] ‘You’re not saving enough for retirement’, which haven’t really landed or have had a detrimental effect [on member engagement].” Impact-related messaging can “make [members] feel a stronger sense of ownership around their pensions”.

Multi-strategy move

It is not unusual for impact funds to invest across multiple asset classes; some examples are Bridges, Just Climate, Mirova, Aavishkar and Brookfield Asset Management. Climate+ has approximate allocation targets: 20-40 percent for private equity; 20-40 percent for infrastructure; 10-25 percent for real estate; 10-25 percent for natural capital and 5-20 percent for more liquid climate-related investments.

Developing a multi-class strategy to meet the 8-10 percent net returns target is much more complex than managing a single-strategy fund and “really hard to deliver”, David Seex, head of Schroders’ private asset solutions department, said at a media briefing. It involves balancing “different jurisdictions, different cashflow profiles, different structures”.

Schroders’ multi-class approach may help DC funds get comfortable with the risk associated with what may be their first major private fund investments. “We’re combining the return-seeking assets like private equity with the more stable assets that produce predictable income with inflation-linked cashflows such as infrastructure,” said Ped Phrompechrut, head of Climate+. “We’re introducing high returns without disproportionately impacting the risk element.”

There is the impact factor too. “We are focused on outcomes rather than asset classes,” Seex added, noting that climate change mitigation and resilience requires multiple different forms of capital.

Impact reporting

Climate+’s impact strategy will be aligned with the Operating Principles for Impact Management, the firm said in a press release. Sharing impact performance information with pension fund beneficiaries “won’t necessarily be the technicalities of the KPIs… but we expect to be able to deliver strong messages [about] assets that people can be proud of and can relate to”, said Tim Horne, head of Schroders’ UK DC fund solutions department.