Strong Movement Towards Green Financing?

Claire Stam of EURACTIV France reports, Pension fund chief: We are seeing a strong movement towards green financing:

Investors increasingly have to take into account the legal risks associated with global warming and more and more of them are adopting a socially responsible approach, Phillippe Desfossé told EURACTIV France as Climate Week opens in New York.

Phillippe Desfossé is the chief executive officer of the pension fund ERAFP, which manages the additional retirement pension for French civil servants. He is also vice chair of the Institutional Investors Group on Climate Change (IIGCC).

Can you describe the organisation you are representing?

ERAFP is a pension fund which manages the additional retirement pension for civil servants. It is a mandatory pension scheme, which is capital-based and was established to benefit the 4.5 million civil servants, whether they are civilian or military officials, or employed by local government, hospitals or the judiciary. Having been established in 2005, the scheme allows civil servants to make contributions from all of their non-statutory income (any remuneration paid other than their index-related salary). These contributions are invested in assets (such as bonds, property or shares), which thereby cover the scheme’s commitments. Today, ERAFP manages over €30 billion. Having been set up 13 years ago, the scheme is only at the beginning of an increase in operations which will continue into the middle of the century. Understandably, its assets are growing: over the next ten years, the scheme’s cash-flow will enable it to invest €2.5 billion a year, on average.

Why did you choose 100% Socially Responsible Investment (SRI)?

We are seeing a strong movement towards green financing. Contributors are increasingly concerned about environmental, social and climate issues. This is either out of conviction or because of the risks and opportunities related to them.

More and more major investors are adopting an SRI (Socially Responsible Investment) approach. ERAFP’s board of directors produced our SRI charter when the scheme was established. For the directors, the pursuit of maximising short-term profit is contrary to the contributors’ long-term interests. ERAFP’s SRI policy is structured around three areas: social issues, governance and the environment. This is why the scheme is heavily involved in the fight against climate change.

Since climate change poses a risk to the pension fund’s assets (for instance, real estate capital on the seafront is exposed to the risk of a rising sea level), their only fiduciary duty should encourage them to measure the risks already present in their portfolios. It is likely that, in the near future, certain investors or funds who have not established any policy to assess, manage or even reduce the risks associated with climate change will be questioned in court.

Given its size, ERAFP implements a pragmatic SRI policy through the “best in class” management method. We invest in all sectors, without excluding any sectors. The objective is to retain the best companies in three areas: the environment, social issues and governance (ESG). For the last three years, we have also been measuring the climate risk of our portfolios.

What do you think about the European Commission’s initiative to promote green financing?

It’s something but we now need to change financing as a whole, rather than just promote green financing in addition to conventional financing. One of the challenges is to reduce the influence of short-termism on our decisions and to promote long-term investments.

Creating products with the “green” stamp is not sufficient in order to transform the system. Similarly, if every member state acts individually, this won’t make much difference. We need to go beyond national frameworks and, as soon as possible bring, about a systemic change which can mobilise considerable sums. It’s a matter of changing scale and, as C. Figueres said at the COP21, “to shift from billions to trillions”.

In this context, we have to mobilise the long-term resources of pension funds. Because of their mass, they can make an important contribution to this mobilisation. For example, in the Netherlands, the assets of pension funds exceed the country’s GDP.

Climate Week has just started in New York and follows on from the Global Climate Action Summit in San Francisco (12-14 September). What do you think about these meetings? In what way are they useful?

These meetings are very useful because they allow investors who are involved in green financing to organise themselves and coordinate – and therefore gain greater influence. When we are organised, green investment becomes a far more significant lever for action. ERAFP is part of the IIGC (Institutional Investors Group on Climate Change), which currently has 160 members and represents €21,000 billion in assets. When the IIGC intervenes at international summits or when its administrators meet national or European authorities, more attention is paid to it than to each of our organisations taken individually.

Very interesting interview and Phillippe Desfossé is absolutely right, in order to tackle climate change, you need scale and a long-term perspective.

I have been discussing climate change more and more on this blog. Michael Sabia recently sounded the alarm on climate change and Hugh O'Reilly also called for action to address it.

Unfortunately, pensions are slow to move on climate risk which is normal since they're slow to move in general.

I suspect in the future, there will be a lot more measuring of climate risk across the public and private market portfolios and a concrete action plan to address these risks. There will also be better reporting of these risks and on the performance of the green portfolios.

Still, pensions have a fiduciary duty to match assets with liabilities, not to focus on green investments except if they help in that goal. It's important not to get swept away in an environmentalist agenda when discussing pensions and climate change.

Below, California Governor Jerry Brown shares outcomes on the Global Climate Action Summit.

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