LGPS investors look to natural capital to drive their net zero transition

If pension funds are “serious” about reaching net zero emissions then natural capital should make up part of their portfolio, Local Government Pension Scheme (LGPS) investors have said.

Norfolk pension fund has recently invested in natural capital and the London Borough of Barnet is also considering an investment as a way to diversify and reduce emissions within their portfolios.

Speaking to delegates on a panel discussion for Room 151's annual Investment Forum, David Spreckley, head of pensions and treasury at the London Borough of Barnet, outlined that the pension fund has established a model portfolio anchored around how it could deploy its capital to reach net zero by Barnet’s 2030 target. He stated that one of the insights that came out of this model is that “if you are serious about net zero from a pension fund perspective then investing in natural capital has to form part of your portfolio”.

According to the early analysis, if Barnet wanted to achieve net zero then around 20% of its portfolio should be allocated towards natural capital and renewable infrastructure, Spreckley explained.

In addition, he highlighted that Barnet’s pooling vehicle London CIV has also embarked on a process of looking at natural capital as an asset class, which the pension fund is very supportive of.

Joining Spreckley on the panel was Alex Younger, head of investment and funding at Norfolk Pension Fund, who added that the fund invested in timber in 2018 to diversify its real estate portfolio. “So, we made that investment then and we've had a good experience of the asset class, so we've subsequently upped and increased our allocation,” he added.

Allocating more towards natural capital

The trend of asset owners looking to allocate capital towards natural capital was also picked up in Room151’s first LGPS survey, which was conducted in partnership with Schroders.

Survey responses showed a continued interest in the climate transition, with more than half, 59% of respondents, suggesting that they want to invest more in climate and natural capital solutions. In addition, 36% of respondents stated that, in their opinion, natural capital is the most attractive net-zero related opportunity.

Presenting the findings at Room151’s annual Investment Forum, Paul Myles, private assets director at Schroders, highlighted that he thinks the share of natural capital will increase alongside the demand for related solutions.

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Stephen Addicott, managing partner at Stafford Timberland, and Robert Hall, director of earth systems impact investment at Federated Hermes Limited, also joined Spreckley and Younger on the panel discussion.

Addicott highlighted that Stafford’s forests remove around 8bn tonnes of carbon from the atmosphere, which is about 20 to 25% of total emissions. He recommended that the most effective way to commit to the area is to invest in scale and to invest in assets with both diversification in the market and geographical location.

However, Addicott did outline that investors should be wary of the risks of investing in timberland as a form of natural capital investment. “The biggest risk that we see within timberland is paying too much for assets. Most people think it's a physical risk, but it is the acquisition risk. The reason for that is that once you buy an asset, it is hard to lose value, but it's also very difficult to make that value up,” he warned.