Wandsworth Pension fund director: ‘Net zero investment can’t be one size fits all’

The UK government is keen to see pension funds dedicate a larger share of their strategic asset allocation to alternatives and has recently proposed a 10% private equity allocation for local government pension schemes (LGPS).

An example of what this could look like is the £2.8 billion Wandsworth Pension Fund, which also includes the pension assets for Richmond Council.

Over the last twelve months, it has put its net zero pledge into action, investing in ground source heat pump business Kensa Group, where the pension fund acted as cornerstone investor.

In total, the pension fund has committed £40 million to the Octopus Energy Transition Fund, £40 million to the Sandbrook Climate Infrastructure Fund and a further £110 million to London CIV’s Renewable fund.

But despite these pledges, Guilliotti cautions against taking a one size fits all approach to investments in net zero, particularly when it comes to setting mandatory targets for private equity investments.

Net Zero Investor caught up with Paul Guilliotti to discuss the fund's approach to net zero and to find out why he is sceptical of mandatory private market allocations. 

Diversification challenges

Wandsworth Pension Fund is part of the £45 billion LGPS Pool London CIV, which manages the assets of 32 partner funds representing the London boroughs. 

But despite being part of an LGPS Pool that offers climate and infrastructure funds, Wandsworth Pension fund took the decision to invest independently, rather than through London CIV. This was largely motivated by a need for portfolio diversification, Guilliotti explained.

“We are invested heavily in infrastructure in general and have got targeted allocations towards a renewable infrastructure mandate. Our committee members are looking at other ways to potentially enhance that investment. Yet to top up within the pool wouldn’t really have been appropriate because the funds that they have are very much focused on generational assets, whereas we wanted a much broader diversification.

“If you are already reducing your options by going for renewable infrastructure as opposed to infrastructure in general, you are going to have to find an appropriate mix,” he emphasised.

Having said that, Guilliotti now sees increased appetite from other London boroughs for renewable infrastructure investments. “There are funds that are interested in what we are doing, they have spoken to me and may well be speaking to London CIV. At least one of the two mandates that we have got is something that they may well be interested in,” he predicts.

But he also warns that when investing in renewable energy infrastructure, appropriate risk management should always remain on the cards. “There are only so many wind farms and solar panels that can be delivered. We only need to look at what happened recently with the offshore windfarm auction which proves my point. We need to look at other aspects of this [net zero] opportunity, this why we had to go out and do it on our own,” he says.

Mansion House impact

He remains sceptical of a mandatory 10% allocation to private equity assets for the LGPS. “The percentage as such is not a major issue for me but I don’t think the government should be prescribing what we do and assume one size fits all. Ten per cent for one local authority or one pension fund might be too low and for others it really is something that may not be right.

“Whilst we will not fall foul of that, personally I don’t agree with it. We are pension funds, not the government. If the government wants to invest, that is what it should be doing, not use our money to deliver it.

“But one of the biggest challenges, and where the government will struggle to prescribe a set allocation to private equity, which generally is riskier, is that funds are now at the higher end of being 100% funded. You need to take risk when your fund valuation is lower, not when you are fully funded. Once you have achieved your outcome, you would want to take a conservative approach. If you are 110% funded, do you really want to run the risk that you might knock that down?”

Good returns

But he is also confident that investing in climate solutions like heat pumps, could ultimately pay off. “We genuinely believe that if you invest properly, you should achieve decent level returns. The predicted returns in this particular fund are in the double digits. If we can get a fully diversified portfolio, even if the odd one doesn’t work, it will still provide you with a good investment return.”

He hopes that other LGPS funds will follow suit. “This investment has multiple benefits, not only is it reducing our carbon footprint, it also helps to reduce fuel poverty in a sector where individuals struggle the most.”

Paul Guilliotti will be a speaker at Room 151’s annual Investment Forum held at the London Stock Exchange in November. Further information about the event can be found here.