Responsible Investment

Since COP21, interest in climate change has accelerated. Whether through global initiatives such as the Task Force on Climate Change (TCFD) or legislation such as in France with Article 29 of the Energy-Climate Law, which replaces Article 173 of the Energy Transition Law, investors are increasingly being asked to consider the risks and opportunities associated with climate change in their investments.

Today, the development of climate change impact indicators should be used to steer investments towards the goals of the Paris Agreement, i.e. a scenario 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.

With this in mind, in recent years, ERAFP has used a battery of indicators to measure the impact of its investments on climate change: carbon intensity, alignment with temperature scenarios, exposure to fossil fuels and the energy mix of the power generation sector. ERAFP is committed to publishing and monitoring its performance on these indicators over time.
ERAFP has published a measure of the carbon footprint of its portfolio since 2014. The scope of assets covered by the carbon footprint measurement has been expanded since then and now includes all its asset portfolios, i.e. the:

• equities;
• public and private bonds;
• convertibles bonds;
• private equity and infrastructure;
• sovereigns and listed companies;
• and real estate.

Assessing the temperature of ERAFP's portfolio is another way of estimating its contribution to the fight against global warming.

This can now be done using 1.5°C or 2°C scenarios, and is a more forward-looking indicator of the climate challenge than the carbon footprint. This assessment is carried out at the level of ERAFP's portfolio of listed companies, and is also broken down by business sector to give a more granular view of the results.
In addition, a comparison of the portfolio's energy mix with a 2°C scenario from the International Energy Agency (IEA) is carried out each year on the sovereign portfolio and the portfolio of listed companies.

Finally, ERAFP also publishes the proportion of its assets within the overall aggregate portfolio covered by Science-Based Targets (SBT).

For your information: Launched in June 2015, the Science-Based Targets initiative aims to encourage companies to set themselves a greenhouse gas (GHG) emissions reduction target aligned with science (trajectory of less than or equal to 1.5° C).

In addition to its global SRI approach and its best-in-class approach, ERAFP invests in assets targeted at the energy transition or contributing to the decarbonisation of the economy in the various asset classes.
In addition, ERAFP invests in climate theme funds, in equities or bonds, as well as in renewable energy or waste management projects in its private equity and infrastructure portfolios.

Since 2019, ERAFP has presented in its annual reports the proportion of its investments that contribute to the decarbonisation of the economy. The scope of this indicator has been broadened compared with previous years. It now includes assets aligned with a temperature scenario in line with the Paris Agreement.

At the end of 2024, investments in the energy transition or contributing to the decarbonisation of the economy represented around 44% of assets. They were 31% higher than in 2023.

The Alliance was launched in September 2019 at the United Nations Climate Action Summit and joined in early 2020 by ERAFP. It identifies shareholder dialogue with companies as one of the levers for achieving carbon-neutral portfolios by 2050. This will contribute to the goal of limiting the increase in global temperature to 1.5°C by 2100, in accordance with the Paris Agreement. As with all Alliance members, this objective is broken down into intermediate targets, with milestones set for each five-year period.

When setting its objectives, ERAFP did not wish to set sectoral objectives. Given the way its assets are managed and the application of a strict SRI benchmark based on best in class, which applies to all asset classes, the implementation of such objectives, which are particularly complex, could also have proved counterproductive. ERAFP has therefore set itself :

• emissions targets for private equity and bond portfolios and directly held residential property portfolios;
  • Reduce the carbon intensity (scopes 1 and 2) of its listed assets portfolios by 60% over the 2019-2029 period; 
  • Pursue actions (SRI filter for stock selection, SBTi certification, engagement, and voting policy) aimed at reducing scope 3 emissions;
  • Reduce the carbon surface intensity of its real estate portfolio by 15% between 2023 and 2028 (scopes 1, 2 and part of scope 3); 
  • Reduce the energy surface intensity of its real estate portfolio by 10% between 2023 and 2028 (scopes 1, 2 and part of scope 3);
  • Achieve a proportion of 30% of its portfolio of real estate assets aligned with the CRREM 1.5°C scenario (second version) by the end of 2028.
• engagement targets for equity, credit and convertible bond portfolios;
  • develop shareholder dialogue with 30 of the companies with the highest GHG emissions in the equity, credit and convertibles portfolios in order to promote an energy transition that is aligned with the Paris Agreement
• targets for financing the transition to a low-carbon economy, covering all asset classes.
  • Increase the amounts invested in assets that contribute to the energy transition and decarbonisation of the economy across the portfolio ans invest €1.5 to €1.8 billion in financing the ecological transition over the 2025-2029 period.

In addition to these objectives, ERAFP has chosen to set an additional objective, known as ‘temperature alignment’, common to its equity, corporate bond and convertible bond portfolios. The objective is to reach a proportion of 55% of companies (as a percentage of the carbon footprint) that have set themselves a temperature alignment objective of less than or equal to 1.5°C, validated by the SBTi by 2029. 

To monitor its emissions target, ERAFP has chosen to measure the carbon footprint of :

• listed companies, to measure carbon intensity by dividing the greenhouse gas emissions emitted by the company by its turnover, in tonnes of CO₂ equivalent per million euros of turnover.
• In real estate, carbon intensity is measured as building emissions per square metre per year.

Monitoring of the implementation and achievement of these objectives is published each year in the ERAFP's annual report.

As part of its SRI approach, ERAFP's Board of Directors adopted a policy on the three main sources of fossil fuels (thermal coal, non-conventional hydrocarbons and conventional hydrocarbons) at its last meeting of the term of office in September 2023.

The aim of this policy is to strengthen the ERAFP's contribution to financing an economy compatible with a scenario of limiting global warming to 1.5°C. It may go as far as divesting companies in the sector whose strategy is not in line with this scenario.  

Based on a review of the main scientific and institutional scenarios, ERAFP's policy takes account of the need for a gradation in the measures to be taken with regard to each energy source. ERAFP has therefore adopted the scientific recommendations for a rapid phase-out of coal and a gradual and very significant reduction in the share of fossil fuels in the energy mix, with priority given to non-conventional hydrocarbons.

Since its inception in 2006, ERAFP's SRI framework has acknowledged the significance of this issue, integrating it into the 'Environmental impact control' criterion of its SRI guidelines. The analysis of companies on this criterion takes into account how they seek to prevent risks to biodiversity. It is imperative that they:

• Identify operations affecting biodiversity.
• Assess ecosystem quality and health.
• Avoid and reduce the exploitation of sensitive areas, ecosystems, plants and animals (e.g. rare plants, deforestation, animal species at risk of extinction and unsustainable farming).
• Rehabilitate exploited areas.
• Manage animal testing responsibly: reduce, refine, replace.

As with climate change, biodiversity loss carries significant financial risks for businesses and investors. According to the Bank of France, 42% of the value of the securities portfolio held by French financial institutions was issued by companies that are highly or very highly dependent on at least one ecosystem service. According to the Finance for Biodiversity Foundation, the most dependent sectors are construction, agriculture and food products through the extraction of resources (forests, oceans, etc.) and the use of ecosystem services (soil, water, pollination, etc.).

While economic activities may depend on biodiversity, they can also exert pressure on it. The Alliance for Natural Capital Financing has identified the sectors with the highest priority for biodiversity, based on their impact on it. These sectors include distribution, mining, oil and gas (exploration, production, storage and transport) and agricultural products. According to the Banque de France, the average impact of €1 million in securities held by French financial institutions is equivalent to the artificialisation of 13 hectares of natural land each year. Please find below the details of the meeting.

For these reasons, and in accordance with Article 29 of the Energy and Climate Law and the latest recommendations of the Task Force on Nature-related Financial Disclosures (TNFD), ERAFP has adopted a 'dual materiality' approach, i.e. taking into account both the financial risks related to biodiversity (financial materiality) and the impacts of its investments on biodiversity (impact materiality).

The definition of a strategy and objectives still faces challenges in terms of the definition and availability of reliable quantitative indicators.
 

Impact Measurement
ERAFP has selected the Carbon Biodiversity Footprint (CBF) indicator developed by Iceberg Datalab to evaluate its impact on biodiversity.

This indicator measures the loss of species diversity in ecosystems to assess the pressure exerted by economic activities on biodiversity. It accounts for companies' direct and indirect emissions and translates their impact into a simple unit: km².MSA, which corresponds to the loss of biodiversity linked to economic activities.

For instance, the destruction of 1 km² of pristine rainforest (MSA 100%) to create an artificial area (MSA 0%) results in a footprint of -1 km².MSA.

Results
As at 31 October 2023, ERAFP's biodiversity footprint was estimated at -0.14 km² per million euro invested. This result can be benchmarked against the biodiversity footprint of the index, estimated at -0.12 km² MSA/M€ invested. It should be noted that an investment of one million euros in companies within ERAFP's portfolio results in the artificialisation of 0.14 km² of land. ERAFP is responsible for an area of 3,330 km² within the MSA. It is important to note that this indicator is not related to the amount invested; that is to say, it increases with assets under management, all other things being equal. For ERAFP, whose assets under management are growing, this indicator is therefore expected to increase.

Dependency Analysis
Furthermore, ERAFP uses the ENCORE tool (Exploring Natural Capital Opportunities, Risks and Exposure), developed through a partnership between Global Canopy and UNEP FI, which identifies companies' dependence on natural resources.

Recognising the accelerating loss of biodiversity and its consequences for the economy and, more broadly, for all living things, ERAFP has decided to step up its efforts to promote biodiversity by joining two initiatives:

• FAIRR: a network of investors created to raise awareness among investors about the most significant risks and opportunities in the food sector, representing 400 investors and $75 trillion in assets under management.
   

ERAFP has joined this initiative and is participating in the commitment to protein diversification, with the aim of encouraging companies to diversify their protein portfolios and enabling the adoption of diets that are better for people and the planet.

• Nature Action 100: a collaborative shareholder engagement initiative launched in 2023, inspired by Climate Action 100+. It aims to encourage large companies with a significant impact on biodiversity to adopt practices aligned with the preservation of ecosystems.

Convinced of the effectiveness of Climate Action 100+, ERAFP saw the launch of Nature Action 100 as an ideal opportunity to engage on biodiversity and develop its knowledge within a structured framework.

These two initiatives are fundamental to strengthening ERAFP's commitment to biodiversity, enabling it to take collective action with companies and better integrate these issues into its investment strategies.

Biodiversity loss has profound and varied repercussions on our planet, including climate change, which is a crucial challenge for our society and economy.

ERAFP recognises its role as a committed institutional investor in addressing this challenge. By incorporating biodiversity considerations into its ESG policy, the institution aims to contribute to the preservation and restoration of natural ecosystems, as well as promote a more sustainable and resilient economy. 

ERAFP biodiversity policy, as published today, aims to align itself with the objectives of the Convention on Biological Diversity adopted in 1992 (namely the conservation of biodiversity, the sustainable use of its components, and the fair and equitable sharing of the benefits arising from the exploitation of genetic resources and associated knowledge) and the Kunming-Montreal Global Biodiversity Framework and its 23 targets for 2030.

The strategic framework is divided into six key areas, covering the entire investment process value chain. These include understanding and measuring issues and impacts, as well as dependencies, guiding investment choices, shareholder engagement, monitoring and communicating implementation. This is all done within the framework of strategic management provided by ERAFP's governance.

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.

Monitoring controversies

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

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.

ESG analysis

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 2024, the aggregated portfolio of listed companies outperforms the benchmark index in terms of SRI. All portfolios outperformed their benchmark index in terms of SRI.

As stated in the SRI Charter, "ERAFP is committed to measuring the impact of its SRI investment policy across all asset classes. To this end, impact indicators are selected for each asset class; these aim—wherever possible and taking into account current best practices in the field—to provide information on the environmental, social, and governance impacts resulting from ERAFP’s investments."

In recent years, ERAFP has also employed a range of indicators to measure the impact of its investments on climate change:

• carbon intensity;
• alignment with a 2°C scenario;
• "green" share and exposure to fossil fuels.

Moving beyond a purely synchronic view—which involves observing the Institution’s performance on these indicators at a specific point in time—the diachronic perspective provided by tracking them over time allows ERAFP to understand how the climate impact of its investment policy is evolving.

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.