France’s FRR tenders for huge €3bn ESG/low carbon equity mandates

Significant shift by fund to lower carbon footprint of portfolios.

France’s €38bn Fonds de Réserve pour les Retraites (FRR), is tendering one of the biggest ever allocations of institutional capital to low carbon, ESG-related equity index strategies by putting €3bn into the market via a highly original set of collaborative discussion mandates.
The FRR, created as a pensions buffer fund for the French retirement system, is one of the world’s highest profile responsible investors with a senior five-member responsible investment committee.
RI can reveal that the fund is switching its equity index strategy to an approach that aims to lower its carbon footprint and take into account ESG criteria, thus necessitating the new mandates.
FRR says it is looking for up to three managers for the briefs, which will be for a non-defined amount subject to negotiation between the fund and the selected managers.
FRR has already taken steps to decarbonise its equity index portfolio. In September last year, it allocated €1bn in assets to a low carbon tracker fund run by Amundi, the French fund manager, based on the MSCI Global Low Carbon Leaders indices.
The receipt of RFP documents for the new mandates has a deadline of Tuesday 15 September 2015 at midday.
The FRR says it is looking for fund managers that are able to replicate an existing equity index, cap weighted or otherwise, and incorporate an ESG strategy whilst minimising the tracking error from the existing benchmark.
The mandate lot bears some of the hallmarks of the low carbon index approach implemented by Sweden’s AP4 government buffer fund: Link to RI report FRR says it has no strategy preference for the mandates, but says it wishes to study different approaches put forward by external managers, negotiate the details and then retain the elements that best suit its investment approach. The fund says: “Notably, the FRR wishes to examine all possible methods for reducing its carbon footprint and fossil fuel exposure applicable to a portfolio of developed market equities run via a non-cap weighted index. More generally, the FRR is researching methods for the integration of ESG integration into this type of portfolio.”
FRR was a founding signatory of the UN-supported Principles for Responsible Investment (PRI) and is a signatory to the UN Global Compact. Its Executive Director is Olivier Rousseau, a former investment banker with experience in both equities and debt. In 2011, the FRR began paying about €2bn per annum into CADES (Caisse d’Amortissement de la Dette Sociale), the state agency charged with funding France’s social security debt, nine years earlier than planned. FRR no longer receives any asset inflows from the state. The plan is that the fund will be fully wound up by 2024. The fund had originally only been scheduled to start paying down its assets in 2020.

The FRR uses EIRIS, the ESG research firm to scrutinise its investments on issues like determining portfolio company involvement in UN-banned munitions such as cluster bombs and anti-personnel mines as well as biological and chemical weapons. EIRIS also assesses the pension fund’s stock and corporate bond holdings against governance criteria. Engagement with companies on ESG risks is carried out by FRR’s fund managers.
Earlier this year, RI reported that FRR was tendering for one of the biggest rosters of bond managers in recent times with a total of up to €8.5bn in assets proposed across 11 different mandates to funds houses running euro- and US dollar-denominated credits.