France’s €6.5bn ERAFP to launch SRI index/mandate and back sustainable property and timber funds

In-house SRI benchmark designed to back responsible investment and risk budgeting rather than market cap.

ERAFP, the Paris-based €6.5bn ($9.5bn) retirement fund for 4.6 million French civil servants – which is 100% SRI invested – is launching its own SRI and risk-based index for investing in small and medium sized companies and will hire a fund manager to run a mandate against it worth tens of millions of euros per annum. The fund is also aiming to allocate hundreds of millions of euros to sustainable property investments and seed a responsible forestry programme, as it gradually broadens its asset palette away from a bond-heavy structure. Speaking to, Philippe Desfossés, managing director of the Paris-based fund, said the new SRI/risk-based index – a novel construction for a pension fund – would be launched before the year end and a request for proposal (RFP) for the mandate initiated. The fund is working on the index with EDHEC, France’s specialist business and finance school. Desfossés said the index, which will focus on French small and medium sized companies (PME in French), will hold between 60 and 100 stocks. An SRI filter will be applied before the companies enter the index. He said the rationale was to create a benchmark based on risk budget rather than company market capitalisation: “One thing I noticed when I joined the fund, and which shocked me, when looking at the MSCI Euro index, was that the market cap of the financial sector amounted to 27%. The question was whether that sector contributed 27% of the valueand if it made any sense to have that kind of risk commitment to the sector. In the last two years, we’ve seen the answer, and now the banking sector represents about 20% of the MSCI Euro. The reason we are creating this index is that we want to buy diversification based on risk budget, which we think is more important, and also to incorporate our own SRI criteria. We’re not inventing the wheel because other investors have worked on index concepts such as minimum variance, etc. What’s complicated though is the index rebalancing in terms of adaptation to the PME sector; you don’t want to do it too often because liquidity for these companies is low. The mandate tracking the index will be worth a couple of percent of the fund’s assets, so a few tens of millions of euros per annum.” Desfossés said the fund would be interested in talking to other investors that might want to sign up to the index. ERAFP’s plans for sustainable property mandates, he said, should become clearer in the coming months: “This is a buyers market, timing is good and we can invest for the long term. As a fund, we have positive cash-flow projections of €1bn per annum for the next 20 years, and want to earmark a good portion of that to property. We need to get government approval to do so, but our board is agreed on the principle. We will put between 5-7% of the fund in quite quickly, so around €80m per annum.” He says the fund will initially invest in French property, probably Paris-based offices, via a

mix of direct and indirect property funds. For ERAFP’s SRI policy to have any coherence, he says, it has to be active in real estate: “According to Mckinsey, property constitutes 20% of CO2 emissions and energy waste. We believe an SRI approach can really help in property, notably on risk. For example, if you buy a building and haven’t done an environmental/energy waste assessment then you are taking an enormous future risk with thatinvestment because of the evolution of regulation in this area, which can move very quickly and be a real barrier to future sale. Mckinsey puts the value of work needed in the property and infrastructure at $600bn in and those property companies well positioned will do well.” Desfossés says ERAFP is also looking to invest in timber assets, probably internationally, but also needs government approval to do so.

ERAFP chief talks about the growth of France’s €6.5bn 100% SRI pension fund: Link to story
Philippe Desfossés, managing director of ERAFP will be speaking at RI’s Future of ESG Integration Conference in Amsterdam on November 11:
Link to conference information