Nearly two-thirds (60 per cent) of Local Government Pension Schemes (LGPS) and defined contribution (DC) schemes believe that private equity is the most effective investment vehicle to drive impact, industry research has found.

The study, conducted by Pensions for Purpose and sponsored by Columbia Threadneedle Investments, showed that the key driver for impact private equity investment was to secure a more sustainable future that benefits schemes’ portfolios, with 33 per cent of respondents identifying this as the primary motive.

This was followed by the pursuit of a solid risk and return profile (25 per cent), boosting member engagement (17 per cent), moral imperatives (17 per cent) and to align with the government's levelling-up initiative (8 per cent).

While the majority felt that private equity was the most effective impact investment vehicle, less than half (43 per cent) were invested in impact private equity.

Pensions for Purpose said that the findings suggested there was “untapped potential” for asset managers and urged them to innovate by enabling DC schemes to adopt impact private equity within their fee limits.

The research revealed a trend towards UK-oriented impact investing but argued that pension schemes should not restrict themselves to UK impacts alone, emphasising the urgency of global issues, such as the green transition.

It also highlighted a discrepancy in limited partners’ (LP) understanding of ‘additionality’, despite it being an “important feature” of impact private equity, and the majority of schemes surveyed do not seek it.

"While our research clearly shows the majority of pension schemes – 60 per cent - view private equity as the best vehicle for achieving impact, there's still room for growth in understanding concepts like financial additionality,” commented Pensions for Purpose chair and founder, Karen Shackleton.

“It's important to recognise that pension schemes are primarily impact investing for financial reasons, but they are also increasingly focusing on UK impact.

“However, we advocate a global perspective on impact investment to meet crucial targets such as the net-zero transition. Asset managers can be pivotal here, by creating innovative strategies that make impact private equity accessible for DC schemes within their fee boundaries."

Columbia Threadneedle Investments director and head of impact, private equity, Andrew Carnwath, added: “The study's findings show the increasing potential of global impact private equity to deliver robust returns and drive positive impact.

“It is promising to see impact private equity emerging as a core component of investor portfolios, with pension funds looking for solid returns whilst making a positive contribution to society and the environment.

“While the research indicates a bias among pension funds for UK impacts, the broader benefits of maintaining a global investment perspective should not be overlooked.”

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