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One of the UK’s largest local government pension schemes has bought a significant stake in the first UK fund manager specialising in returns from cutting companies’ flooding and water-quality risks.
The West Yorkshire Pension Fund has made a 25 per cent venture capital investment in Rebalance Earth, which specialises in water-related “nature as a service” contracts. Under such agreements, companies pay the manager for the benefits they receive from nature restoration.
A typical flooding incident costs a business £82,000, according to a review commissioned by the Mayor of London.
Chancellor Rachel Reeves has raised questions about the future of independent local government pension schemes such as West Yorkshire’s. She has suggested they should be merged into one, UK-wide entity.
Leandros Kalisperas, chief investment officer at the West Yorkshire fund, said it regarded the Rebalance Earth investment as “pretty important”.
“We’ve devoted quite a lot of resources to making it happen,” he said, adding that he hoped to “accelerate Rebalance Earth’s business plan”.
Reeves has announced a review, overseen by pensions minister Emma Reynolds, to look into how to merge the UK’s 86 separate local government pension schemes. The government hopes that a single fund, with about £360bn of assets, might boost investment in UK businesses.
Kalisperas said that WYPF’s role as a large in-house asset owner had helped it to make the Rebalance Earth investment because the team had been able to do all of the due diligence itself.
WYPF has not disclosed the size of its investment. But people close to the deal said it was one of the UK’s largest seed investments in recent years. It was worth millions of pounds but was only a small proportion of the scheme’s £20bn total fund, they added.
Under the “nature as a service” contracts, Rebalance Earth will assess companies’ exposure to flooding, identify areas where habitat restoration might reduce the risk and make the necessary changes. It will then earn returns from companies’ payments for their lower risk.
Some investors are sceptical that a consolidated £360bn local government pension scheme (LGPS) would make funds available for seed investments such as that in Rebalance Earth. They fear a larger scheme would lack the local knowledge to make such investments, which tend in the UK to total only up to £5mn each.
“It’s highly unlikely that we would exist if LGPS was one big consolidated fund,” said Duncan Johnson, chief executive at Northern Gritstone, an investment business focused on university spinouts in the north of England. More than half of Northern Gritstone’s funding has come from local government schemes based in the region.
Previous nature-based funds have focused on areas other than water. They have included carbon credits — payments for projects that reduce greenhouse gas emissions — forestry and biodiversity.
Rebalance Earth is seeking to focus on nature restoration projects that make businesses or local authority areas more resilient to water-related risks. Companies and councils will pay it based on an assessment of the benefits they receive from the projects.
Payments under the contracts will reflect monitors’ assessment of the benefits to the company.
“By investing in restoring local ecosystems, stakeholders can enhance their operational resilience,” said Rob Gardner, chief executive of Rebalance Earth.
He added that his goal was to make a compelling case to companies that nature was “business-critical infrastructure”.
The Environment Agency estimates that 185,000 commercial properties and 5mn people are at risk of flooding in England and Wales.
Gardner said he had sought investment from a pension fund, rather than a venture capital investor, because of the long-term investment horizon of pension funds.