Gresham House’s Peter Bachmann talks to PMP about the new generation of institutional investors turning to real assets that combine financial returns with environmental impacts
Peter Bachmann is the managing director of Gresham House’s Sustainable Infrastructure division and co-fund manager for the British Sustainable Infrastructure Fund (BSIF) strategies. He is also a member of the Gresham House Asset Management (GHAM) board.
What role can sustainable real assets play in institutional portfolios?
Bachmann: Asset owners understand there are many big environmental and social challenges and are looking to private markets to do the heavy lifting. Public companies don’t tend to do greenfield projects as they take years to plan, build and reach profitability.
Private SPV companies can start from scratch to build climate and nature solutions. These are often good risk and return diversifiers, offer impact and tend to outperform public markets over the long term. With a growing understanding among asset owners of their fiduciary duties, including climate and environmental considerations, we are seeing a longer-term growth cycle in sustainable real assets.
How do investors keep track of impacts without the reporting requirements imposed on public companies?
Bachmann: People often talk about how complex impact reporting can be – but it’s actually quite simple. It’s about making improvements that otherwise wouldn’t exist – displacing carbon emissions, saving water and land, and creating new jobs and opportunities, for example. We report biannually on how much has been saved.
We have brought together all of our major sustainability-related disclosures into a single, comprehensive Sustainable Investment Report, aligned with the International Sustainability Standards Board (ISSB) framework.
We ask a third party to establish the ‘existing way of businesses operated’ to establish baseline carbon emissions. We then look at the changes the company could make. For example, when our vertical farming business displaces imported produce, it creates GHG savings.
Vertical farming sounds cutting edge, is it currently fully functional?
Bachmann: We’ve got two farms. One is Europe’s largest, fully-automated vertical farm with 25,000 sqm. We’re selling crops into supermarkets and moving towards commercial breakeven. Hopefully, I will be able say we’re at full profitability by year end. Short-term it’s growing leafy greens, micro greens and herbs. Longer term, as we bring down costs, we plan to grow key ingredients – the alternative proteins of soy and peas as well as the food staples of rice and wheat. The flightpath is towards creating meaningful impact at scale.
How can managers combine the objectives of achieving returns and sustainability improvements?
Bachmann: One misnomer is that impact comes at the cost of returns. The industry must be very clear that we can create impact without detracting from returns. Impacts can enhance returns and protect companies from the risk of additional tax or regulation. Sustainable companies operate slightly de-risked business models, offer superior products and can help to change unsustainable industry practices.
While carbon credits are very helpful, we don’t assume any income from them in our base cases. We aim to create better products than the incumbent competition but critically at or below their prices. The sustainability benefits then help to create a better and differentiated product.
For example, vertical farming produces up to 1,900 times less carbon than long-haul imported produce. It uses 95% less water, 99% less land and no chemicals and pesticides – but we can produce at or below the price of field-grown crops and the product lasts 14-21 days longer. Why wouldn’t you pick a product with all these benefits?
The challenge is not finding high-growth, high-productivity businesses that have great impacts, but rather the large scale sources of capital to fund them.
Peter Bachmann, Gresham House
Is there enough investor interest in sustainable real assets to make a difference?
Bachmann: The need for investment is far larger. Sustainable real assets often fit into infrastructure allocations, which may be just 1-5% of a scheme’s strategic asset allocation plan. To bend the curve, we need to increase allocations to 20% or more over time. The challenge is not finding high-growth, high-productivity businesses that have great impacts, but rather the large scale sources of capital to fund them.
The big US endowments, like Stanford University’s, have historically allocated up to 70-80% to private markets. They have consistently outperformed and have a better risk profile. Modelling shows well-managed private markets funds are a good way to allocate a large portion of a portfolio.
is there a sufficient flow of investment in the UK?
Bachmann: Overall, the market is growing. LGPS funds have been our main source of capital to date, as our 10-year-plus closed-ended vehicles suit their investment horizon, whereas most corporate DB schemes are in run-off.
The most interesting new area is master trusts and some other DC schemes, including the UK’s new LTAF structure. We’re working with a few that recognise they can manage liquidity at the scheme level, rather than in underlying funds. They are interested in accessing strong net returns through exposures that also provide diversification. The DC market is maturing and we are starting to see flows.
The other growth area is the insurance market. Insurers are attracted by repeatable cash flows and diversification benefits. Potential Solvency II regulatory changes in the UK mean they may need to allocate less capital against some private market investments.
Sustainable real assets can produce fundamentally very strong businesses with great productivity that create high-quality jobs. Impact is just a happy byproduct. Businesses in our fund have created 3,700 jobs and c.£200 million of revenue in many of the less populous parts of the UK.
As well as financial returns, LGPS funds want to create prosperity in the regions and hence have been big supporters of our strategies from a ‘local investment’ perspective. Increasingly, with initiatives such as the Mansion House Accord, other UK pension schemes are focussed on finding compelling investments in the UK.
We’re also seeing a shift in pension funds’ understanding of their fiduciary duty. Many now recognise the need to support the environment, nature and social issues so their members can retire financially secure as well as having contributed to improving many national and international challenges.
The Pensions Review lists many government-led opportunities, from infrastructure to social housing. How interested are you interested in these?
Bachmann: Our two rural fibre internet businesses have been awarded six government contracts with subsidies to build out connectivity in rural areas. Project Gigabit is a great initiative that aims to connect the last 20% of the UK without fast fibre.
Separately, The Environment Act 2021 has effectively created a market around biodiversity net gain (BNG), mobilising billions without any government funding. It has catalysed a new market that allows private actors to invest in the rebuilding of nature. The government has, and can, do interesting things to catalyse new product with compliance markets such as they have created in BNG. It is a good way to attract new investment without having to fund it. What government in the world doesn’t want that?
How have these opportunities in biodiversity and nature-based infrastructure been progressing?
Bachmann: The Environment Act, effective February 2024, compels greenfield planning applicants to improve post-development biodiversity by at least 10%. Developers can do so on-site, but the land given-up involves an opportunity cost. A 100-acre development for a few-hundred new homes could save c.£50 million by utilising an offsite biodiversity habitat bank, and importantly deliver much better outcomes for nature. Under the Act, there are objectively determined metrics and very high-integrity structures, which are policed to ensure the desired outcomes are delivered.
The Lawton principle says landscape-scale habitat banks are better for nature. We create these habitat banks within the local planning area and divide them into units that developers can buy to discharge their obligations. We receive revenue upfront for 30+ year operation costs as well as our return. We’ve done deals with the National Grid, warehouse developer Panattoni, all the big housebuilders and most big supermarket groups.
It is world-leading legislation and should be applauded. There aren’t any other ‘landscape scale’ nature restoration compliance markets and a lot of countries are looking at it as an example of what they should adopt.
We’re seeing a huge amount of activity and it’s performing very well – it’s 10X ahead of our investment case. It’s great to see the big house builders embrace it after realising how much land they would have to give up to do BNG themselves. Residents want to help nature but don’t like the wild and messy areas on-site. We’re turning non-productive, non-food-grade land into woodlands, wetlands or grassland which in turn will help restore the nature we have lost in the UK.