West Yorkshire Pension Fund buys 25% stake in flood prevention investor

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One of the UK’s largest local government pension schemes has bought a significant stake in the UK’s first fund manager specializing in companies’ flood risk reduction and water quality returns.

The West Yorkshire Pension Fund has made a 25% venture capital investment in Rebalance Earth, which specializes in water-related ‘nature-as-a-service’ contracts. Under such agreements, companies pay the manager for the benefits they receive from restoring nature.

A typical flood 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 the one in West Yorkshire. She suggested they should be merged into one UK-wide entity.

Leandros Kalisperas, chief investment officer at the West Yorkshire fund, said he saw the Rebalance Earth investment as “quite significant”.

“We’ve dedicated quite a bit of resources to make this happen,” he said, adding that he hopes to “accelerate Rebalance Earth’s business plan.”

Reeves announced a review, overseen by pensions minister Emma Reynolds, to look at how to merge the UK’s 86 separate local government pension schemes. The government hopes a single fund, with around £360 billion in assets, could boost investment in UK businesses.

Kalisperas said WYPF’s role as a large in-house asset owner helped her make the investment in Rebalance Earth because the team was able to do all the due diligence itself.

WYPF did not disclose the size of its investment. But people close to the deal said it was one of the UK’s biggest seed investments in years. It was worth millions of pounds but represented only a small part of the scheme’s total £20bn fund, they added.

Under nature-as-a-service contracts, Rebalance Earth will assess companies’ exposure to flooding, identify areas where habitat restoration could reduce risk and make the necessary changes. It will then earn profits from companies paying for their lower risk.

Some investors are skeptical that a £360 billion Local Government Consolidated Pension Scheme (LGPS) would make funds available for core investments such as that in Rebalance Earth. They fear that a larger scheme would not have the local knowledge to make such investments, which in the UK tend to amount to only up to £5m each.

“It’s very unlikely that there would be if LGPS was a 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 came from local government schemes in the region.

Previous nature-based funds have focused on areas other than water. These included carbon credits – payments for projects that reduce greenhouse gas emissions – forestry and biodiversity.

Rebalance Earth seeks to focus on nature restoration projects that make businesses or local authority areas more resilient to water 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 the monitors’ assessment of the benefits to the company.

“By investing in the restoration of local ecosystems, stakeholders can increase their operational resilience,” said Rob Gardner, Executive Director of Rebalance Earth.

He added that his goal was to make a compelling case to companies that nature is “business-critical infrastructure.”

The Environment Agency estimates that 185,000 commercial properties and 5 million people are at risk of flooding in England and Wales.

Gardner said he sought investment from a pension fund, rather than a venture capital investor, because of the long-term investment horizon of pension funds.