Many French institutions have embraced the sustainability agenda, not least because of government-led initiatives. In 2017, the French government issued a series of green bonds to finance a sustainability programme. Asset managers such as Amundi, BNP Paribas have also launched green-bond products and strategies.

While Fonds de reserve pour les retraites (FRR), the French pension reserve fund, has embraced and integrated the sustainability agenda in its investment strategies and was one of the first to incorporate climate change into its portfolio, initially as a risk-management tool, it does not invest in green bonds. 

Olivier Rousseau, executive director of FRR explains: “The green bond market is still small, particularly in the investment-grade bond sector. When we reviewed our investment-grade bond mandate in 2016 we looked into this and found it too small. There is of course the possibility that once we look into renewing this mandate in the future there will be more options available,” he said. Rousseau also expressed concern that the problem of ‘greenwashing’ is real and needs to be addressed in order to attract more institutional investors. Consistent rating, measuring and transparency is still lacking, he argues.

FRR does not invest in sovereign bonds other than French sovereigns and treasuries to pay Caisse d’Amortissement de la Dette Sociale (Cades), he notes.

On the investment side, FRR’s sustainability journey started with the equity portfolio and environmental impact which has been measured since 2007. In 2014, FRR joined Amundi, MSCI and the Swedish buffer fund AP4, in creating a low-carbon leaders index, taking into consideration fossil fuel reserves and carbon emissions.

In 2016-17, FRR renewed its passive equity mandates and one of the main criteria was ESG integration. FRR is renewing its French and European small-cap mandates and US equities shortly, and has an active RFP out for Japanese equities, all with increased emphasis on ESG integration.

FRR at a glance
• French pensions reserve fund
• Location: Paris
• Assets: €36bn
• €200m in five environmental infrastructure projects
• €200m in residential housing
• €500-600m in impact investments (mandate to be awarded in Q2 2019)

Rousseau says French legislation makes the RFP process very onerous: “This is why it is very important for us to clearly define what we want and do our homework from all aspects so as to not waste anyone’s time.”

asset allocation

Instead of green bonds, FRR is focusing on green financing in renewable energy infrastructure, 50% of which has to be in France. So far it has committed to five projects, totalling €200m. It also has €200m in real estate investments in a residential housing project. Rousseau hopes France’s pension reform will lead to revised investment criteria for FRR. Increasing the investment horizon, for instance, would allow it to increase its real estate allocation.

Furthermore, FRR has a search outstanding for a €500-600m global equity impact investing mandate which is expected to be finalised in the second quarter of 2019. “This mandate will be close to 2% of assets and is equity focused. There could be some bonds but it is unlikely,” Rousseau said.  

One of the main challenges ahead for FRR is measurement: “This is key for both for bonds and equities. If you look at the ESG-rating of any single bond or stock the three major rating agencies all give a different view. The credit risk goes from A+ to B-. Things are yet to mature,” he said.

Having said that, Rousseau sees improvements in measurement and integration but takes a pragmatic view across the portfolio.

“We are not the saviours of the world, we are investors. But these green issues are not just legal requirements they are also moral questions and we have a role to play in pushing for transparency and improvements,” he concludes.