A comprehensive, fully integrated ESG approach
Since 2006, ERAFP has implemented a socially responsible investment (SRI) policy that is central to the Scheme’s strategy, making it a frontrunner in the SRI arena. By incorporating sustainable development considerations in its financial management practices, ever since it was founded ERAFP has adopted a socially responsible investment approach, which it documents in its SRI charter
The ERAFP SRI charter's five values
In order to assess the extent to which issuers comply with the various essential principles of the rule of law, and their contribution to the respect and promotion of human rights, ERAFP is guided by three major principles:
- The absence of discrimination, in all its forms;
- Freedom of opinion and of expression and respect for all other fundamental rights;
- Responsible management of the supply chain, with the particular aim of preventing forbidden forms of labour, and in particular the worst forms of child labour.
Because it is particularly attentive to all of the different issues relating to work and employment, ERAFP shall, when selecting issuers, give priority to those who:
- Ensure responsible career management and apply forward-looking employment policies;
- Ensure fair and sustainable distribution of the added value created;
- Endeavour to improve working conditions;
- Propose products and/or services with a beneficial social impact.
ERAFP shall assess the way in which issuers respect the rights of employees and other workers, and shall give priority to those who score positively on the following principles:
- Respect for the rights of trade unions and promotion of social dialogue;
- Improvement of health and safety conditions.
Because it is aware that all investments can have an impact on the living conditions of the citizens of today and tomorrow, ERAFP supports sustainable development activities. Accordingly, it intends to promote, in particular, the protection of the environment and sustainable land use planning. The principles applied are:
- Documentation and implementation of an environmental strategy;
- Control of environmental impact;
- Control of risks linked to climate change and contribution to energy transition;
- The environmental impact of the product or service.
Although the public or private status of issuers shall still be taken into account, ERAFP intends to make its choices based on compliance with four main principles:
- Good governance;
- Protection of and respect for customer/consumer rights;
- Prevention of corruption and money laundering;
- Transparency and responsibility with regard to lobbying;
- Fiscal transparency and responsibility.
The SRI values embodied in the ERAFP Charter constitute as many responses to the challenges that we collectively have to face.
Best in class approach
The best in class principle is applied to the investment process by using quantitative rules to help define the eligible investment universe. These rules are set for each asset class with the aim of fostering progress across the board. Generally speaking, this means:
- not excluding individual business sectors, but promoting the issuers with the best ESG practices within each sector and, more generally, within groups of comparable issuers;
- showcasing progress made;
- monitoring and supporting issuers that have adopted a continuous improvement approach.
For investors of ERAFP's size who wish to adopt a uniform cross-cutting approach across all the asset classes in which they invest, the best-in-class approach seems to be the most consistent:
- it applies not only to all the Scheme’s investments but also to all investment phases, from the stock-picking process to monitoring the securities or assets held following the investment;
- it is based on a broad range of values applied across all investments, instead of on an array of theme-specific criteria;
- it factors in links between different issues and among various issuers instead of addressing each situation separately.
Conversely, it might seem inconsistent to exclude certain business sectors completely, given that the portfolio includes issuers from other sectors or other asset classes that have direct links to the excluded sectors.
Until 2012, ERAFP’s SRI approach mainly relied on applying environmental, social and governance (ESG) criteria when selecting portfolio investments. In December 2012, the approach was enhanced by adopting shareholder engagement guidelines, intended to define a framework within which ERAFP (and/or its delegated asset managers) can fulfil their role as active shareholders. Our SRI charter states that: “ERAFP is determined to support, on a long-term basis, those organisations in which it has decided to invest, by exercising its responsibilities as shareholder or stakeholder in such a way as to sustainably promote, within these entities, practices that comply with the values it supports.”
ERAFP's involvement in collaborative engagement initiatives, in order to benefit from the experience of other investors and the positive effects of pooling resources and assets under management. This involvement covers the various areas covered by the institution's SRI approach
- tackling climate change(IIGC, Climate Action 100+, Mirova, RE 100);
- preventing social risks in the supply chain (PRI, Mirova, ICCR);
- promoting best governance practices internationally (Global Asset Owners Forum, Asian Corporate Governance Association);
- tackling aggressive tax planning practices (PRI).
A policy for voting at general meetings based on guiding principles aligned with ERAFP’s SRI approach, namely:
- transparency about business operations, financial performance and audit effectiveness;
- respect for long-term shareholders, giving priority to investments and fair profit distribution policies;
- fairness, moderation and transparency of executive remuneration;
- fair treatment of shareholders;
The voting policy is updated annually so as to build on lessons drawn from each general meeting season and make it ever more relevant.
While equity management companies implement the policy on the Scheme’s behalf, ERAFP ensures that it is correctly interpreted and that the positions expressed are consistent, by coordinating voting by its delegated asset managers for a sample of companies. In 2020, this sample comprised 40 major French companies and 20 major international companies.;
As an investor committed to ensuring that its SRI approach evolves in a manner consistent with its fiduciary duty, ERAFP has chosen to adopt an impact approach for part of its investments. As part of this approach, it has prioritised three specific investment areas that are compatible with its profile as a long-term investor:
Fighting climate change
There has been ever-mounting interest in climate change since the COP21 summit. Whether through global initiatives such as those led by the Task Force on Climate-related Financial Disclosures (TCFD) or legislation such as Article 29 of France's Energy-Climate Act, which replaces Article 173 of the Energy Transition Act, investors must increasingly take into account the risks and opportunities linked to climate change in their investments. Today's investors must use climate change impact indicators to ensure that their investments are in alignment with the Paris Agreement's goal of limiting global warming to well below 2°C.
When ERAFP was created, its board of directors decided that all its investments would comply with an SRI charter that attaches great importance to limiting greenhouse gas emissions. ERAFP believes that:
- the best-in-class approach enables it to direct investments, sector by sector and asset class by asset class, towards the issuers best able to contribute to sustainable development in general and the energy and ecological transition in particular;
- • through collaborative engagement, investors can pool their resources and significantly increase their clout and influence over multinationals and other issuers. For this reason, ERAFP is involved in the work being done by the Institutional Investors Group on Climate Change (IIGCC) and in the Climate Action 100+ initiative.
In 2020, ERAFP reached another milestone in its responsible investing approach: by joining the Net-Zero Asset Owner Alliance (AOA), it made a firm decision to align its SRI strategy with the Paris Agreement and achieve carbon neutrality by 2050.
ERAFP believes that investors must:
- be transparent with their backers and beneficiaries about their investment criteria and selection procedures (exclusions, best-in-class selection, thematic approach, etc.);
- provide tangible proof of the impact of their approach, for example by measuring the carbon footprint of their investments, investing in “green” or “social” bonds whose proceeds help to fund projects with environmental and/or social added value, publishing the energy savings made by managing their property assets responsibly, etc.
Measurement and publication of climate indicators for ERAFP’s portfolio
In view of the above, ERAFP has used a series of indicators in recent years to measure the impact of its investments on climate change, including carbon intensity, alignment with temperature scenarios, exposure to fossil fuels and the energy mix in the power generation sector. ERAFP is committed to publishing and monitoring its performance with respect to these indicators over time.
ERAFP has published a measurement of its portfolio's carbon footprint since 2014. The scope of assets included in its carbon footprint measurement has increased since 2014 and now includes all the Scheme's asset portfolios, i.e. equities and public and private bonds, convertible bonds, private equity and infrastructure investments, sovereign bonds, listed companies, and real estate portfolios.
The temperature assessment for ERAFP’s portfolio is another metric that can be used to estimate its contribution to tackling global warming. Temperature assessments can now be based on 1.5°C or 2°C scenarios and constitute a more forward-looking indicator of climate impact than carbon footprints. Temperature assessments are conducted on ERAFP’s portfolio of listed companies, as well as on individual business sectors, so as to obtain more granular results.
In addition, the portfolio's energy mix is compared annually with the International Energy Agency (IEA) 2°C scenario for the sovereign and listed companies portfolios.
Lastly, ERAFP also publishes the percentage of assets in its aggregate portfolio covered by science-based targets (SBT).
For information: Launched in June 2015, the Science-Based Targets (SBT) initiative aims to encourage companies to set science-based targets for reducing their greenhouse gas (GHG) emissions (pathways to targets of 1.5°C or well below 2°C).
Financing the energy transition and decarbonisation of the economy
In addition to its overarching SRI approach and best-in-class approach, ERAFP makes targeted investments across the various asset classes in assets that are involved in the energy transition or that contribute to the decarbonisation of the economy.
ERAFP also invests in climate equity and bond funds, as well as in renewable energy and waste management projects in its private equity and infrastructure portfolios.
Joining the Net-Zero Asset Owner Alliance (AOA)
Launched in September 2019 at the United Nations Climate Action Summit, AOA aims to provide its members with a framework to support them over the long term in achieving the carbon neutrality of their portfolio by 2050, and in the shorter term in achieving a series of intermediate targets in 2025, 2030 and 2040.
As a member of AOA, ERAFP contributed to the drafting of the Target Setting Protocol for 2025 - published last October - which establishes the following principle: Alliance members must reduce their portfolio’s greenhouse gas emissions by 16-29% by 2025, compared with the 2019 level.
ERAFP's climate goals:
In its roadmap, ERAFP has set itself targets for reducing its carbon intensity, for engagement and for financing the transition.
For listed companies, carbon intensity is measured by dividing the company’s greenhouse gas emissions by its revenue in tonnes of CO2 equivalent per million euros of revenue. For real estate, carbon intensity is measured as a building’s emissions per square metre and year. The carbon intensity reduction target for the equity and corporate bond portfolios is 25% from end of 2019 to the end of 2024. For real estate, the target is twofold: keeping the portfolio aligned with a 1.5°C pathway and reducing its carbon intensity by 15% over the period specified.
In terms of engagement, ERAFP aims to involve around thirty companies in its portfolio that generate the highest GHG emissions. Some commitments will be implemented by ERAFP through collaborative initiatives such as Climate Action 100+, while others will be delegated to its asset management companies.
Support for economic activity
Aware of its ability, as a long-term investor, to support economic activity and employment, ERAFP decided very early on to finance listed SMEs and mid-caps by taking stakes in smaller companies. The changes in its investment framework subsequently enabled it to broaden its range of instruments and to finance SMEs and mid-caps by investing in “FPE” (Fonds de Prêt à l'Économie - funds dedicated to lending to the real economy) and private equity. The two major crises that have shaken the global economy over the last 10 years - the 2008 crisis and the current crisis - and to which SMEs and mid-caps have been particularly exposed, have only reinforced ERAFP's conviction regarding the role it has to play with these companies.
Access to housing for public-sector employees
Published in 2016, the Dorison/Chambellan Le Levier report was based on the observation that public-sector employees arriving in high-pressure neighbourhoods faced specific difficulties in finding and renting affordable and suitable housing. The authors pointed out the role that institutional investors could play in financing so-called "intermediary" housing for public-sector personnel.
Designed to facilitate access to housing in high-pressure areas where rents are high in relation to disposable incomes, intermediary housing comprises rental properties positioned between social housing and open market properties (charging rents 10-15% below market levels). It thus represents a solution mid-way between private and social housing for people with incomes higher than the social housing threshold.
Aware of this very early on, in 2014 ERAFP participated in the first and second fundraising rounds for the intermediary housing fund.
Since then, ERAFP has extended its efforts to finance other projects involving intermediary and affordable housing, also primarily intended to be rented out to public sector employees.
ERAFP’s contribution to the Sustainable Development Goals (SDGs)
The 17 Sustainable Development Goals, adopted in 2015 by the member States of the United Nations, constitute common guidelines for all actors to promote a sustainable future.
Investors, who continue to play a central role during transition periods as their actions will impact the “post-SDG world” in both positive and negative ways, can use several levers to achieve the SDGs:
- Integrating the SDGs in their investment decision-making processes,
- Complying with codes of good practice,
- Incorporating individual and collective commitment in their actions.
It is with this in mind that ERAFP signed the French public investors’ charter to promote the sustainable development goals, making commitments to:
- Incorporate the SDGs in its investment strategy: targeted actions to achieve priority SDGs.
- SDG 13 “Action to combat climate change” for tackling climate change;
- SDGs 8 and 9 "Decent work and economic growth" and "industry, innovation and infrastructure" for supporting economic activity and employment;
- SDG 11: "Sustainable cities and communities", for the financing of intermediary housing.
- Ensure that internal operations comply with the SDGs; adoption of internal operating principles compatible with the SDGs (responsible management approaches for personnel, premises, purchasing, etc.).
- Assess the impact of its activities on the SDGs: inclusion in its non-financial reporting of the results of its contribution to the specific targets set for the priority SDGs.
- Disseminate best practices: disseminating best practices to promote the SDGs to its staff and peers, as well as through in-depth dialogue with companies, financial institutions and other stakeholders for which it is a shareholder, creditor, delegated manager or partner.
ERAFP implements the provisions of Articles 3, 4 and 5 of European Regulation 2019/2088 of 27 November 2019 on sustainability-related disclosures in the financial services sector, which require entities subject to the legislation to publish on their websites:
- their policies on incorporating sustainability risks into their investment decision-making processes;
- their policies on taking into account the main adverse impacts that investment decisions have on sustainability factors;
- information on how they incorporate sustainability risks into their remuneration policies.
Consideration of sustainability risks
In 2019, while implementing the recommendations of the TCFD (Task-Force on Climate-related Financial Disclosures), ERAFP sought to assess the potential financial impact of climate-related risks on its investment portfolio, limiting its study to transition risks and physical risks.
This analysis is available on pages 71-84 of the Scheme’s 2020 annual report.
ERAFP does not currently have the tools it needs to assess the exposure of its asset portfolio to ESG risks. However, it endeavours to limit its exposure using the following three tools:
- monitoring controversies;
- shareholder engagement;
- ESG analysis.
When updating the SRI charter in 2016, ERAFP’s board of directors wanted to do more to tackle risks arising from situations that could potentially lead to controversies and from issuers’ exposure to controversies. It therefore asked its delegated asset managers to monitor, on its behalf, controversies to which issuers may be exposed, particularly those involving proven violations of international standards or principles of social and environmental responsibility, namely:
- the Universal Declaration of Human Rights;
- the ILO Declaration on Fundamental Rights and Principles at Work;
- the Rio Declaration on Environment and Development;
- UN conventions (including the convention against corruption).
If a controversy is identified, dialogue is initiated with the issuer. If the dialogue does not succeed, three means of action are considered:
- intensified dialogue between the issuer and delegated manager in preparation for voting at the general meeting;
- any other legal means enabling ERAFP to protect its interests;
- the sale of securities by the delegated manager.
Shareholder engagement enables investors to encourage companies to incorporate ESG factors more effectively into their practices. This in turn limits the investor's exposure to the risks associated with a company's failure to integrate these factors.
ERAFP engages as a shareholder with issuers to influence their ESG practices through its delegated asset managers, through its direct involvement in collaborative engagement alongside other investors and by exercising its voting rights at general meetings of shareholders.
This shareholder engagement is consistent with the guidelines adopted by ERAFP’s board of directors in 2012 and updated annually. The guidelines establish priority engagement themes for the year, as well as the voting policy that ERAFP's delegated asset managers must adopt at general meetings. ERAFP closely monitors the implementation of its voting policy at meetings of the 40 French companies and 20 international companies that carry the most weight in its equity mandates.
Non-financial analysis is conducted to ascertain where an issuer stands with respect to ESG factors. The consolidated rating assigned to the issuer enables the management company to assess its grasp of the issues underlying the criteria covered in the assessment.
In accordance with its best-in-class approach, ERAFP invests in those issuers that obtain the highest ratings in their business sector. By doing so, it limits its exposure to the risks associated with an issuer's failure to take ESG issues into account.
ERAFP also ensures that its best-in-class SRI strategy is effective by comparing its portfolios’ ESG ratings with those of its benchmark indices. In 2020, all its portfolios outperformed their benchmark in terms of SRI. A detailed analysis of ESG ratings by asset class is presented in part 3 of the 2020 annual report.
Impact of the investment policy on sustainability factors
As stated in the SRI charter, “ERAFP is committed to measuring the impact of its SRI investment policy in all its asset classes. To this end, impact indicators are used for each asset class. The aim is to provide information on the environmental, social and governance impacts of ERAFP’s investments, to the extent possible given the assessment techniques available in this field.”
In recent years, ERAFP has also used a range of indicators to measure the impact of its investments on climate change, including carbon intensity, alignment with a 2°C scenario, the weight of “green” investments and exposure to fossil fuels. Beyond a purely synchronic view, where the results obtained from these indicators are considered at a specific moment in time, monitoring the results over time provides investors with a diachronic view that sheds light on the evolving impact of their investment policy on climate change.
ESG risks and SRI governance at ERAFP
Pursuant to Article 22 of Decree 2004-569 on the French Public Service Additional Pension Scheme, ERAFP’s board of directors is responsible for setting guidelines for its socially responsible investment policy. It also oversees the effective implementation of this policy by management. To this end, it relies on the work of the investment policy monitoring committee (CSPP). Thus:
- At each CSPP meeting, an update on the monitoring of engagement initiatives and the main controversies is presented to its members.
- After each general meeting season, a report on ERAFP's votes is presented to the committee.
- • Every six months, a report on changes in the SRI ratings of the portfolio's various allocations – compared with their benchmark – is presented to the CSPP.
Where necessary, ERAFP’s management proposes changes to the SRI policy. It is responsible for implementing the policy and ensuring that the SRI approach is properly implemented by the external asset management companies to which it delegates financial management (except for directly managed sovereign and similar bonds), whether in terms of following rules for selecting securities in accordance with the best-in-class principle or ERAFP’s voting policy at general meetings of shareholders. The SRI aspects of mandates are discussed at the half-yearly management committee meetings between ERAFP and each of its delegated asset managers.
In addition, SRI issues are taken into account when setting individual targets for ERAFP’s management.
To know more about SRI
Socially responsible investment (SRI):
what are we talking about?
Decision to invest all the Scheme's assets based on an SRI approach
Signature of the Principles for Responsible Investment (PRI)/Adoption of the SRI charter
First adjustments to the SRI rating framework
Ongoing diversification of investments
Adoption of shareholder engagement guidelines
Participation in collaborative engagement initiatives
Publication of the carbon footprint of ERAFP’s equity portfolio
ERAFP joins the Portfolio Decarbonisation Coalition (PDC)
Publication of the new SRI charter
Investments aligned more closely with the fight against climate change
ERAFP implements TCFD recommendations
Signing of the Tobacco-Free Finance Pledge and withdrawal from the tobacco industry
ERAFP joins the Net-Zero Asset Owner Alliance
ERAFP adopts objectives for 2025, in line with its target of making its investment portfolio carbon neutral by 2050.