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Yves Chevalier: "The FRR aims to decarbonise the majority of its equity indices portfolios"

According to Yves Chevalier, Executive Board member of the "Fonds de Reserve pour les Retraites - FRR", the fund aims to decarbonise almost all of its equity index portfolios. Currently, its outstanding assets involved in decarbonization are estimated at about 1.1 billion euros and could reach 4 billion in the course of 2016.

Article also available in : English EN | français FR

Introducing the FRR universe:

The Reserve Fund for Pensions, is a long-term investor. Its goal is to invest in a portfolio of highly diversified assets while ensuring compliance with a number of community values conducive to economic, social, and environmental development.

Since 2003, the FRR Supervisory Board laid down the principles of a SRI strategy underlining the need for the FRR to promote through its management companies, best practices in terms of financial analysis and corporate governance transparency.

Since then, the FRR was actively involved in the promotion of socially responsible investment, in particular by launching, in June 2005 the first tenders dedicated to SRI.

Founding member of the United Nations Principles for Responsible Investment (PRI), the FRR has signed them and serves on their board. It sets up a "Comité de l’Investissement Responsable - CIR" and calls for tenders regarding the selection of providers able to evalutate both environmental and social quality and its portfolio governance and also to assess its contribution to sustainable development, while identifying non-financial risks to which the FRR may be exposed. Concomitantly, during the review of the strategic asset allocation, the Supervisory Board requested that the impact of global warming should be the subject of a particular study. In early 2007, the FRR reaffirms its support for the "Carbon Disclosure Project" (CDP), one of the most important initiatives regarding environment and climate change, supported by the United Nations Environment Programme (UNEP) and bringing together 285 institutional investors. Similarly, in 2007, a first evaluation of the environmental footprint (including carbon footprint) of the FRR portfolio was completed.

2008 will see the adoption of a new SRI strategy (2008-2012) going further in the integration of ESG issues, particularly in terms of environmental impact. This new strategy also confirms the FRR guidelines, and tends to increase the participation of the FRR to French and international research on SRI. In 2008, the FRR has realised the first study on its own carbon footprint (CO2 equivalent), and has chosen to offset its own emissions by financing the development of a hydroelectric project in Mexico, thus neutralizing its own carbon footprint. This initiative is part of the FRR desire to mobilize its employees on climate change issues.

In 2010, the FRR has supported the initiative of the "Emerging Markets Disclosure Project" (EMDP) which encourages companies from emerging countries to publish data regarding their non-financial performance, using the framework provided by the "Global Reporting Initiative" (GRI). The new SRI strategy (2013-2017) is based around 4 priority areas: taking into account ESG factors in the portfolio management, driving social responsibility, exercise of voting rights of the FRR, contribution to research on SRI and supporting international initiatives, which has materialized in joining the "Global Investor Statement on climate change", in 2014.

Finally, aware that global warming is a long-term risk factor which could have a negative impact on the value of its assets, in 2014 the FRR wanted to go further and has developped an equity index reducing the carbon footprint for a portion of its portfolio, with the help of the Swedish AP4 fund, Amundi and MSCI,. In September 2014, the FRR has joined the initiative of "Coalition Decarbonization Portfolio" or "PDC", a collaborative initiative that aims to reduce emissions of greenhouse gases by mobilizing a critical mass of institutional investors committed to measure and to decarbonise their portfolios. This initiative led the FRR to publish the methodology and results portfolio carbon footprint in June 2015. The FRR aims to decarbonise almost all of its equity index portfolios. Currently its outstanding assets involved in decarbonization are estimated at about 1.1 billion euros and could reach 4 billion in the course of 2016.

Next Finance: What were the FRR motivations to participate in the implementation of the Principles for Responsible Investment "PRI"?

Yves Chevalier: In accordance with the law and its SRI strategy, the FRR wanted to preserve the coherence of its investment policy, respecting values conducive to economic, social and environmental development.

That is why, from the outset, the FRR has decided to participate actively in the UN initiative for the development of Principles for Responsible Investment (PRI). This initiative brought together a group of international investors who are committed to serve the best heirs and align their investment policies with society interests and sustainable development. It is therefore entirely consistent with the long-term investment strategy of the FRR.

In 2003, when the SRI strategy was defined, it was based on two essential elements:

  • An active policy of exercising its voting rights on the basis of public guidelines;
  • The inclusion in the financial management of collective values favorable to balanced economic, social and environmental development.

Under these conditions, adherence to PRI enabled the FRR to ensure the implementation of its strategy and strengthen its collaboration with other institutional investors.

At last, initiation of PRI coincides with the publication of the results of the tender launched by the FRR in 2005 in order to select specialist fund managers having a responsible investment process. The FRR has defined a number of principles as guidelines for fund managers involved in SRI mandates in terms of stock selection and shareholder dialogue practices.

These principles were declining FRR expectations regarding companies included in its portfolio, as a component in their strategic choices and management practices and in their behavior towards their stakeholders.

The FRR remain convinced that the combination of its adherence to the PRI and his own socially responsible investment criteria is a strong and pragmatic framework which will enable it to gradually contribute to improve corporate governance and the consideration of its social and environmental externalities.

The FRR remain convinced that the combination of its adherence to the PRI and his own socially responsible investment criteria is a strong and pragmatic framework which will enable it to gradually contribute to improve corporate governance and the consideration of its social and environmental externalities.
Yves Chevalier member of the FRR Executive Board

Why the FRR has decided to sign the Declaration on Climate Change of the UN summit held on September 23, 2014 ("Global Investors Statement on Climate Change") ?

In reaffirming its social responsible investing strategy in 2013, the FRR has taken a number of commitments in order to increase ESG factor integration in the asset management business, including financing companies which preserves the environment or generates a societal benefit.

With this in mind, as our previous adherence to PRI, the signature of Montreal Pledge under the "Global Investors Statement on Climate Change" makes sense and complies with the FRR will to preserve its investment policy coherence with values conducive to sustainable development. The 35 investors who have signed the "Pledge Montreal" are committed to publish annually the carbon footprint of their equity investments.

What are the commitments given by the FRR under these initiatives?

By signing the "Global Investors Statement on Climate Change"), the FRR has committed on the following points:

  • Cooperate with the authorities to take measures in order to support the energy transition financing towards a low carbon economy;
  • Identify and evaluate low-carbon investment opportunities;
  • Develop the investor capacity to assess risks and opportunities associated with climate change and incorporate it into investment methodologies;
  • Promote dialogue with the companies included in portfolios, regarding climate change;
  • Publish initiatives and progress achieved.

This initiative was strengthened by the active participation of the FRR to the "Portfolio Decarbonization Coalition", after it has committed to measure and publicly communicate the carbon footprint of its investment portfolio and to decarbonise gradually its portfolio.

The FRR has kept its commitment by publishing the results of the evaluation of its carbon footprint on its website in June 2015.

The FRR aims to decarbonise the majority of its equity index portfolios. Currently, assets affected by the decarbonization are estimated at about 1.1 billion euros and could reach 4 billion in the course of 2016.

The FRR aims to decarbonise the majority of its equity index portfolios. Currently, assets affected by the decarbonization are estimated at about 1.1 billion euros and could reach 4 billion in the course of 2016.
Yves Chevalier member of the FRR Executive Board

What it the exact meaning of "measure the carbon footprint" for an investment portfolio? What are the methods used to reduce the carbon footprint ?

At the present time, there is no universal method to reduce the carbon footprint of an investment portfolio. The FRR has decided to focus its analysis on the equity portfolio for developed and emerging markets in late 2013 and 2014. The study covers the CO2 emissions generated by the companies, their direct suppliers and their hydrocarbon reserves ("stranded assets").

In terms of method, the FRR has chosen a carbon footprint measure based on absolute and intensity values:

  • Absolute footprint is calculated for 1 000 euros invested;
  • In the portfolio, for each company, carbon intensity is calculated by dividing their annual CO2 emissions by their annual turnover. To better understand the origin of its carbon performance, the FRR has also distinguished the sectoral effect from the asset selection effect within each sector.

Then the FRR has compared the results of its equity portfolios to its strategic allocation benchmarks. These indices reflect the geographic diversification of FRR investments : 40% in the euro zone, 40% in other developed countries and 20% in Emerging countries. Regarding the portfolio absolute footprint, for 1 000 euros invested, emissions are valued at 357 kgCO2e against 421 kgCO2e for equities included in the index. The FRR portfolio is 15% less carbon emitter than its benchmark.

At the end of 2014, the FRR equity portfolio carbon intensity is valued at 419 tonnes of CO2 equivalent per million euro turnover, 12% lower than its portfolio benchmark.

The carbon footprint expressed in intensity, decreased by 4% between 2013 and 2014, due to significant improved performance relative to the indices, whether in developed countries or in emerging countries.
Yves Chevalier member of the FRR Executive Board

The carbon footprint expressed in intensity, decreased by 4% between 2013 and 2014, due to significant improved performance relative to the indices, whether in developed countries or in emerging countries. This relative performance is mainly the result of investments made in 2014 on low carbon indices ("low carbon" indices) in developed countries.

These good results are mainly due to the asset selection effect in each sector, this effect has been improved between 2013 and 2014. This trend is particularly strong for the equity portfolio in emerging markets, in sectors such as utilities and basic resources (mining and energy companies).

The presence of companies whose earnings come from mining activities in the FRR’s portfolio makes significant risk of depreciation in the event of legislation changes and/or operating prices. 209 companies are exposed to fossil reserves and represent 6.67% of the total portfolio value. This proportion places the overall FRR portfolio to a lower level of exposure than the benchmark (7.75%) or the MSCI World All Countries (8.37%). Moreover, this exposure is reduced from 2013 to 2014.

The FRR will continue its analysis of global warming impacts on the definition of its investment policy. In this perspective, it will be particularly attentive to existing or future technical progress, in particular regarding capture and sequestration carbon.

These technical progress could indeed have a positive impact on the profitability of the energy sector companies and those which heavily generate greenhouse gases in a context where carbon price but also standards or taxes to curb global warming are set to increase.

The FRR will also continue its efforts to reduce over time the carbon intensity of its portfolio and its exposure to fossil reserves to ensure a control and a risk reduction of its portfolio. Soon, a new tender, focused on this theme will be launched for equity index management.

With the Swedish pension fund AP4, Mirova and Amundi asset managers, the FRR has been at placed the forefront of the initiative of "Coalition Portfolio decarbonisation"

The "Portfolio Decarbonization Coalition" is a collaborative initiative, launched in September 2014, which aims to reduce emissions of greenhouse gases by mobilizing a critical mass of institutional investors committed to measure and decarbonise their portfolios. The FRR is placed forefront of this initiative. By signing the "Montreal Pledge" and joining the coalition, the FRR is committed to measure, publicly communicate its investment portfolio carbon footprint and gradually decarbonise its portfolio.

Beyond reducing the carbon footprint and more generally in terms of sustainable development, are there any thematics on which you intend to support changes? Are you already invested in funds related to sustainable development? If yes, for which amount in total?

Since 2011, the FRR, through its mandates "New sustainable SRI Equity Growth Europe" seeks to favor companies benefiting from the best practices or those which implement proven progress dynamics. In order to do that, it has chosen not to refer to a benchmark, which enables its managers to overcome the short-term constraints and focus on stock selection. Moreover, to give more impact to its action, the FRR has chosen to focus on a seldom monitored area : the small and mid caps in order to educate and support them in their development. In this context, the FRR requires that its fund managers follow ten quantitative indicators based in the 3 following pillars, Environment, Social and Governance, and to report thereon. In total, 250 million euros are managed using this approach.

In 2012, the FRR has also decided to invest over 165 million euros in mandates dedicated to innovative companies in environmental issues in six areas: water, environmental technologies, treatment and waste management, renewable energy, climate change and sustainable development .

In 2012, the FRR has also decided to invest over 165 million euros in mandates dedicated to innovative companies in environmental issues in six areas: water, environmental technologies, treatment and waste management, renewable energy, climate change and sustainable development.
Yves Chevalier member of the FRR Executive Board

Next Finance , July 2015

Article also available in : English EN | français FR

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