France's $25-billion pension fund invests only in ethical companies

Share

Philippe Desfossés is a no-nonsense idealist.

The chief executive officer of a new $25-billion pension plan for civil servants in France is managing Europe's largest socially responsible investment fund with a requirement that all its investments meet ethical and environmental criteria.

But he rejects the suggestion that his social investment mandate means he has had to focus narrowly on "green" companies developing environmental technologies, saying he is taking a pragmatic approach to finding the most sustainable companies in an array of industry categories.

"When you are a big investor, especially a pension fund, you cannot invest only in wind farms," he said in an interview Wednesday during a visit to Toronto to meet with Canadian pension managers.

He also insists he will not compromise returns to invest in socially responsible companies, saying top performers are often the firms that give most consideration to social, environmental and governance issues that are key to his investing mandate.

"We are not philanthropists. We have to make money," he says. "And when people say, 'My philosophy is to make money,' I say, 'Mine is exactly the same, but in a sustainable way.'"

Mr. Desfossés heads the Établissement de retraite additionnelle de la fonction publique (ERAFP), the manager of the RAFP pension plan, which was launched in 2005 to provide a supplemental pension benefit to 4.5 million French civil servants on top of the government's standard pension plan.

While Canadians have a long tradition of government pension plans investing their holdings globally in an array of assets to earn returns to pay pensions, that model was far less familiar in France. Before RAFP was created, other government pension plans paid benefits from general government revenues without building up a large pool of invested assets to pay the pensions.

Mr. Desfossés said the decision to create a proper pension fund to back the RAFP promise required negotiation with unions to win support for the concept that employees would essentially become global investors, agreeing to use their money to invest in stocks or bonds of private-sector companies to earn returns. As part of the negotiation, the unions asked that the money be invested under socially responsible guidelines.

RAFP currently holds 72 per cent of its assets in government and corporate bonds, and is restricted under its investment rules to holding at least 65 per cent in bonds. Even the bonds must be invested under socially responsible criteria, including rules prohibiting government bonds from countries that allow the death penalty, use child soldiers or practise torture.

The death penalty restriction means RAFP is a rare major pension plan that owns no U.S. government bonds, which are typically a staple holding of many large diversified funds.

Mr. Desfossés says the guidelines leave him ample space to seek out the best options in all industry sectors rather than excluding any industries out of hand. That means the fund is willing to buy stocks or bonds in oil, gas, mining and forestry companies that operate sustainably.

"People say you should not invest in oil any more, or you should not invest in cement, or whatever. No, we say you have to take the world as it is," he says. "It's a complex world and we don't get rid of oil just by a magical touch over night."

He has been shifting more money out of governments and into corporate bonds, arguing he has more faith in the sustainability of many large international companies than in some financially weaker governments. Most of the fund's government bonds are in Europe, but it also holds some Quebec bonds denominated in euros, Mr. Desfossés said.

RAFP earned returns of 4 per cent last year on its portfolio, which lags rates earned by some funds with large equity holdings. But the pension plan is 106-per-cent funded, which means it has a surplus above the estimated long-term cost of providing pensions to workers, because it has been designed to be sustainable at a lower rate of return.

Mr. Desfossés says socially responsible investing makes sense for a pension fund with a long time horizon because the philosophy favours companies that are taking a long-term approach and are not squandering assets to earn quick, short-term returns.

"It's a truism, but it's really true, that what cannot go on forever will stop," he says. "Can you exploit the forestry, or fish more fish than the sea can deliver, year after year? If you look at the carbon footprint or the impact on the world, we know that we are extracting from the Earth more than what the Earth is able to renew."