RI has partnered with the Committee on Workers Capital (CWC) to publish a series of CWC Trustee Profile interviews with union-nominated pension fund trustees that touch on the role of individual board members in driving innovation around responsible investment at their funds.
Philippe Soubirous is Vice-President of Préfon and a board member at Ircantec, where he represents plan members as a representative of French union Force Ouvrière. He is also the co-founder of the Réseau d’administrateurs pour l’investissement responsable (Trustee Network for Responsible Investment), known as RAIR, in France.
Ircantec (the pay-as-you-go pension arrangement for non-tenured employees of the state, territorial authorities and public bodies) is a French supplementary pension scheme managed by a joint board of trustees with 34 members (16 employer representatives, 16 beneficiary representatives and two qualified members). The scheme has a pay-as-you-go and a statutory reserve component. The scheme has circa €10bn invested in bonds, shares, real estate and alternative investments (including private equity and impact investing). The fund delegates 90% of its assets to external managers.
The fund, which has responsible investment principles as a significant part of its manager selection criteria, has been involved in some of the biggest RFP tenders in recent years:
Préfon established an individual, optional supplementary pension scheme for civil service employees, former employees and their spouses in 1967. It is managed by a board of trustees composed of a maximum of 40 members. The members of Préfon’s governance structures are from the four founding trade union federations – FO, CFDT, CFTC and CGC – or official representatives of the civil service.
Préfon does not directly manage the Préfon-Retraite pension scheme. Instead, it holds a group insurance policy with CNP Assurances, reinsured by AXA, Groupama and Allianz, through which each insurer is responsible for the scheme’s financial management. Préfon ensures respect for the principles of solidarity, social progress and equality in the management of the funds through the selection of socially responsible investments.1. Why were you interested in becoming a pension fund trustee?
Philippe Soubirous: My interest developed through my work in the trade union movement, which began with work on legal issues such as pension law. Over time, I was asked to take part in boards of trustees and I developed an interest in pensions. I am trained as a lawyer and I worked in the courts for 7-10 years. During the pension reforms implemented in France in the 2000s, I worked on the legislation regulating pensions. I have always carried out this work within Force Ouvrière, the French trade union.
2. How are the values of the beneficiaries you represent reflected in the funds you manage? And how has this changed over time?
First of all, we should note that the issue of financial and extra-financial pension reserves management is a very recent one. Up until the 2008 crisis, no substantial questions were asked. The emergence of the ERAFP (Établissement de Retraite Additionnelle de la Fonction Publique Pension Scheme) pension fund was a game changer, since its trustees opted for a very robust socially responsible investment (SRI) policy as soon as the plan was established. The beneficiaries’ values are reflected in two different ways.
The emergence of the ERAFP pension fund was a game changer
Firstly, in terms of the plan governance structure, which brings together employer and worker representatives. The trade union representatives clearly contribute social values, such as the principles of solidarity and respect for rights. These values have been formalized and articulated in the form of SRI charters. The charters were drawn by bringing principles and strategies – such as security selection and shareholder engagement – to the table. Universal values and principles such as those enshrined in international conventions are given priority. Ircantec was quick to adopt a very well-structured SRI charter. Under this plan, the board of trustees has a fiduciary duty that requires this approach.
Préfon, on the other hand, has completely delegated its asset management and it endeavours to share its SRI approach with the insurers who have fiduciary responsibility over the assets and their management. The growing global overall awareness of the issues at stake assists us in setting extra-financial guidelines for the plan.
3. How do you achieve a balance between the organisation’s/employees’ common values, your own values and the need to generate financial yields in your decision making as a trustee?
The balance is achieved by bringing neutrality and objective elements into the debate between the stakeholders on the board of trustees. We do this by setting a primary goal of securing pension rights, which creates an obligation for prudent financial management of the assets. There was a debate, at one point, in which some argued that by doing good, we risked earning less money, or none at all. That is no longer an issue. Returns are, and will always be, the primary goal. The second way is to share the idea that we have a social responsibility when we invest pension contributions in capital markets. That is, assets can be put to work, but not at any price. Everyone agrees with this – some out of conviction and others out of fear of reputational risk. This gives rise to an ethical and responsible approach that translates into a collectively accepted framework. The key is to refer to external and undisputable factors, such as the international conventions signed by France. No one can argue that we shouldn’t respect the law by which everyone must abide. The same applies to more flexible legal instruments, such as those of international organisations like the OECD. It is, therefore, by defusing the debate, and being very professional in our approach, without losing sight of our fiduciary duty, that we find a balance in SRI.
4. What are the key elements that enable you to incorporate ESG/responsible investment factors into the policies of the board of trustees?
There are several. The first is the choice of the fund. I would argue that SRI is subjective and therefore a matter of choice. SRI in Islamic finance is not the same as in Nordic countries, which is not the same as what is practised in France. Accordingly, the board of trustees has to make a number of ethical choices. In our retirement schemes for public employees, this has translated into the adoption of SRI charters (e.g. Préfon, Ircantec).Regulations and public policies also have to be taken into account. The first is the obligation to respect legal obligations. Investing in a company that manufactures prohibited goods is inconceivable. In terms of policy, we have an obligation to disclose measures taken to calculate our carbon footprint or to ensure that our choices and actions support the transition to a low-carbon future (e.g. Préfon, Ircantec). Then there are the shared beliefs, such as the values of solidarity between workers and between countries that trade unions bring. We have not heard much from our beneficiaries regarding the issue of SRI. That said, we know they are interested in ethical and responsible asset management. We often come under pressure following controversies such as Rana Plaza, Dieselgate or executive pay at Nissan-Renault. It goes without saying that reputational risk and controversies compel us to take action and impact our SRI policy choices. Finally, fiduciary networks – such as the network of trustees for responsible investment, the RAIR, which is very close to the CWC – constitute a very strong lever that enable us to share information and practices or even organise shareholder coalitions.
5. What are the key elements that limit your ability to incorporate ESG/responsible investment factors into the policies of the board of trustees?
The first limit is our fiduciary duty, which is to ensure that the pensions are safe and that they prosper. If we implemented a large-scale exclusion policy, the risk would not be spread over industrial sectors or geographical zones, and our portfolios would be weakened by the lack of diversification. So we are obliged to constantly strike a balance between the need to be rigorous in our responsible investment choices and the need to ensure the fund generates returns. Then there are the less formal obstacles and limitations linked to the domestic context in France. If we implemented large-scale exclusions of sectors such as the nuclear industry in France, a country where 80 per cent of the electricity produced is from nuclear power plants, we would be faced with a serious social problem in the very short term.
Let’s not forget that we are representatives of trade union organisations, which defend the material and moral interests of workers in all sectors. So we can’t say to a group of them, “sorry but we’re going to destroy your industry and make you lose your jobs because the world has to change.” The ultimate goal of SRI cannot be separated from the immediate impact. That’s why at Ircantec we have opted for an approach balancing best-in-class and exclusion, which allows us to maintain sectoral, geographical and asset class diversification. In this way, aside from fundamental exceptions, if we invest in an industry that pollutes, such as cement, we will try to select the best (in terms of ESG) in the sector and endeavour to encourage them move towards energy or industrial transition technologies.