The Local Investing Mandate: Why the LGPS Local Investing Agenda is a Strategic Imperative for UK Sustainable Finance

Sarah Forster, CEO and co-Founder, The Good Economy

Note: The views expressed on these pages are the opinions of their respective author(s) only and do not necessarily reflect the views and opinions of UKSIF.

This website should not be taken as financial or investment advice or seen as an endorsement or recommendation of any particular company, investment or individual. While we have sought to ensure information on this site is correct, we do not accept liability for any errors.

 

The Local Investing Mandate: Why the LGPS Local Investing Agenda is a Strategic Imperative for UK Sustainable Finance

Sarah Forster, CEO and Co-founder, The Good Economy

A significant policy evolution is underway within the United Kingdom’s investment landscape – one that promises to reshape the relationship between institutional capital and local economic development. The government’s ‘Fit for the Future’ pension reform programme has established a powerful new mandate for the Local Government Pension Scheme (LGPS). This is not a minor regulatory adjustment, but a structural realignment of one of the world’s largest pension schemes – with nearly £400 billion in assets, projected to reach £1 trillion by 2040 – to address some of the UK’s most persistent economic challenges, including regional inequalities and a chronic domestic investment gap.

For the sustainable finance community, this development moves place-based impact investing from a niche, discretionary activity to a core strategic consideration. At The Good Economy, we have prepared an essential strategic guide for this new terrain with our latest White Paper, “Scaling-Up Local Investing for Place-Based Impact“. Based on extensive consultation with the LGPS sector, we have created a framework for navigating what is arguably the most important domestic impact investing agenda of the decade.

A Shift from Discretionary to Mandatory Action

The ‘Fit for the Future’ reforms represent more than a recommendation; they establish a formal requirement for LGPS Administering Authorities (AAs) to develop explicit local investing strategies. Crucially, this includes setting target allocation ranges and reporting annually on the impact of those investments. As a result, transparency of impact and local benefit is going to be increasingly important for LGPS fund allocators.

This mandate necessitates a clear and consistent framework for identifying and categorising suitable investments. We propose a practical methodology built on the Place-Based Impact Investing (PBII) model. This organises opportunities into six core pillars that are both investable and central to local development: Housing, Regeneration / Real Estate, Infrastructure, Clean Energy, SME Finance and Natural Capital. These pillars provide a common language for investors and local government, defining the tangible, real-economy assets capable of delivering both appropriate risk-adjusted returns for pension members and measurable, positive outcomes for communities.

 

A New Alignment: Integrating Capital with Place-Based Strategy

The strategic innovation of this agenda lies in its mechanism for alignment. The framework requires LGPS funds and their Pools to collaborate directly with devolved Strategic Authorities (SAs), ensuring that investment strategies are informed by new, bottom-up Local Growth Plans (LGPs).

This creates a systematic pathway connecting top-down institutional capital with democratically defined, place-specific priorities. It ensures that capital allocation is not arbitrary but is instead grounded in a coherent economic strategy. For example, a pension fund can now be expected to consider investments in a local SME finance fund or a clean energy project that has been identified as a priority within that region’s own growth plan, all while fulfilling its fiduciary duty.

 

The Market Response: An Emerging Need for Specialised Products

This new framework necessitates a sophisticated market response. The operating model outlined by the government requires the AAs and Pools to collaborate on strategy, while Pools will be responsible for implementation and execution. Consequently, these Pools will require a new generation of specialised investment products.
The demand will be for:

• Specialist fund managers with demonstrable regional expertise
• Innovative investment structures, such as regional ‘sleeves’ on national funds
• Blended finance vehicles that can effectively combine public and private capital
• Co-investment opportunities in infrastructure, housing, and regeneration

And, importantly, fund managers will need to understand their local impact and identify the extent to which these products are aligned with local growth plans.

Pioneering examples of these models are already in operation, demonstrating the viability of the approach. For the UK’s sustainable finance sector, this represents a substantial opportunity to design and deliver the institutional-grade products that will be essential for the successful implementation of this agenda.

You can view the case studies here.

 

The Measurement Challenge: Standardising Place-Based Impact Reporting

A pivotal element of the new mandate is the requirement for impact reporting. The government has, at this stage, refrained from prescribing specific metrics, creating a crucial opportunity for the industry to lead in establishing a robust and credible standard.

This is a challenge the sustainable finance community is uniquely positioned to address. Our White Paper proposes a practical methodology grounded in the internationally recognised Five Dimensions of Impact (what, who, how much, contribution, risk). This approach enables a move beyond generic ESG scoring towards a more nuanced framework for measuring place-based outcomes in private markets. Building on the PBII Reporting Framework, co-created with a number of LGPS and asset managers, it will allow us to demonstrate, with credible data, how LGPS capital contributes to sustainable economic growth through job creation, the development of affordable homes, and progress towards decarbonisation within the communities where scheme members live and work.

 

Conclusion

The ‘Fit for the Future’ agenda represents a landmark development for UK domestic investment. It establishes a market for institutional-grade products that can deliver both financial and social returns and provides the mechanism to align substantial capital flows with local, sustainable development strategies. This is the moment for the sustainable finance sector to provide the expertise and innovation required to help turn policy into lasting prosperity for communities across the UK.

 

Note: The views expressed on these pages are the opinions of their respective author(s) only and do not necessarily reflect the views and opinions of UKSIF.

This website should not be taken as financial or investment advice or seen as an endorsement or recommendation of any particular company, investment or individual. While we have sought to ensure information on this site is correct, we do not accept liability for any errors.