Octopus Investments is expanding and diversifying its portfolio as it aims to nearly quadruple assets under management by 2050. Impact Investor talks to Benjamin Davis, the company’s CEO of Fund Management.
Octopus Investments rose to prominence almost a decade ago when it funded the creation of Octopus Energy, a renewables-powered rival to the UK’s established energy suppliers. Now the firm has ambitions to disrupt the UK carbon credits market in a similar way with a portfolio diversification into the natural capital arena.
The company is part of the privately held Octopus Group, a B Corp co-founded in 2000 by Simon Rogerson, the current group CEO. Octopus Investments manages some £13.5bn (€15.84bn) of assets covering renewable energy, sustainable real estate including affordable housing and care homes, and other infrastructure and venture capital investments. It is also one of the largest investors in the UK’s Alternative Investment Market (AIM).
The fund manager is no longer the majority stakeholder in Octopus Energy – the recipient of investment from big international backers over the years – but remains the largest shareholder with a 36% stake.
Retail origins
Octopus Investments started off as a mainly retail operation, but the business is now almost evenly split across its funds in terms of value between more than 60,000 retail investors and around 140 institutional investors.
If it is to hit its stated goal of expanding its assets under management to £50bn by 2030, the fund manager will need to pull in substantial institutional investment and diversify its portfolio.
One current move in that direction is the development of a natural capital strategy, launched in May 2024, with details of a fund with an overall target of at least £150m due to be fleshed out in coming months.
Market disruptor
Benjamin Davis, CEO of Fund Management at Octopus Investments, believes the firm has a role to play in restoring credibility to a carbon credits market that has attracted criticism in recent years, due to doubts over whether the credits are really mitigating climate change impacts to the extent advertised.
“That’s one of the reasons why we’re entering the natural capital market. We think there’s an opportunity to develop legitimate, trusted carbon credits that people can rely on,” Davis says.
He believes this makes the market a good fit for Octopus.
“We quite like entering markets that are not particularly trusted or there’s an element of dysfunction. We think there is opportunity where there is that mistrust. That’s why we backed Octopus Energy from the beginning, because people weren’t happy with their existing energy suppliers,” he says.
In an effort to develop robust carbon credits, Octopus says it will be focusing on generating high-integrity carbon removal credits through conservation and land management in the UK, while seeking to provide investors with attractive, sustainable returns.
“We will be planting trees, restoring peatland, enhancing biodiversity, and trying to create trusted carbon credits, working closely with communities to manage land in a slightly different way,” Davis says.
Early investments are expected to be mainly in Scotland and focused on afforestation projects, as these qualify for carbon removal credits, rather than harder-to-quantify carbon avoidance credits.
Davis says finding the right partners and producing accurate and transparent data on the extent of carbon removal would be central to this push. Who those partners will be is yet to be announced.
As part of doing things in a “different way”, Octopus plans to apply a place-based investing lens to its natural capital investments, which will make communities more invested in the projects, and add further reasons for investors seeking to make an impact to provide funding.
“It’s not just about planting trees. We want to really engage with the local community and get them involved. We could look at opportunities for job creation, and other sorts of revenue streams, which might involve using the land for different purposes, whether it’s eco-tourism, or perhaps partnering to put renewables on the land,” Davis says.
Investing in affordable housing
The company has also bolstered its affordable housing strategy, launched in 2023. In July, it said commitments to its Affordable Housing Fund, mainly from UK Local Government Pension Schemes (LGPS), had risen to £210m. Social impact investor Better Society Capital (BSC) made a £10m commitment to this total in January.
In the UK, affordable housing is defined as aimed at people whose needs are not being met by the private market, and which is for sale or rent for at least 20% less than local market prices. The pitch for long-term investors such as pension schemes is that an affordable housing fund can provide the sort of steady, guaranteed long-term income streams on which their investment strategies are usually centred.
Octopus Investments is initially targeting the delivery of some 5,000 homes for let over an unspecified number of years, of which around 1,500 would be financed by the amount raised by the fund so far. Some of these are being built as co-investments with local authorities keen to build extra housing stock in their own areas, others are being built in areas where demand is most acute around the country.
Around 1.3 million people are estimated to be on UK local authority social housing waiting lists, while the newly installed Labour government has an ambitious target of building 1.5 million homes over the next five years.
Private sector initiatives such as those Octopus are involved in are supposed to be part of the solution. However, Davis – who led the Octopus Real Estate team for six years until 2023 – is conscious that there is a limit to what one fund can achieve to alleviate the UK’s acute housing shortage through impact investment.
“We would absolutely love to scale this over the coming years into billions of pounds. It’s just a question of doing it at a sensible pace in the right way,” he says.
Octopus also hopes to help finance high quality, energy efficient homes, taking advantage of the wider group’s expertise in green energy. Among its other green initiatives for the sector, the Octopus Real Estate’s lending division also operates a scheme to encourage small and medium-sized housing developers to build greener by offering lending at reduced interest rates if they build to a high energy efficiency specification.
Energy efficient care homes
Octopus Investments also seeks to apply cross-sector expertise to the 100 residential care homes for the elderly, owned through its £1.4bn Octopus Healthcare Fund, with highly insulated new builds ditching fossil fuels to use solar panels, battery storage and heat pumps to provide power and heat.
While going green does add to up-front costs of care homes, it makes it easier to attract funders looking to make impact investments and improves the financial footing of the third-party companies managing them – and paying rent to Octopus – by reducing their operational costs, according to Davis.
Mindful of the poor reputation of some UK residential home chains in terms of the care they offer, Davis is also keen to point out that Octopus doesn’t just look at the business plan of potential operators prior to signing contracts, but also employs a small team of experienced ex-nurses to vet the operator’s track record.
