“Frustration.” That’s how Alain Reuter, chairman of the Caisse Nationale d’Assurance Pension and the du Fonds de Compensation (FDC), which manages a large part of the CNAP’s reserves via an investment fund, feels about Greenpeace's of the FDC’s investment policy. While he does not question the NGO’s objectives and methods, he believes that the latter minimises--or even ignores--the effects of the fund’s 14 years of responsible investment, as well as the efforts made in terms of transparency.

Reuter refers to the second edition of the FDC’s responsible investor report, which describes the efforts made to reduce the carbon footprint and align with the Paris Agreement on climate change. The report has been available since 15 January. “As an institutional investor, the FDC is aware of its ecological, social and good governance responsibilities,” he insists.

These efforts are all the more commendable “given that the regulatory foundations of the FDC do not mention any sustainability issues,” points out Christian Würth, the adviser responsible for the FDC’s fund.

In-house strategy and outsourced management

How does the Fonds de Compensation establish its investment policy? The strategy is first discussed internally, taking into account developments in the pension system, which ultimately provides the fund with surplus contributions. The board of directors then decides which products to invest in, which geographical zones to favour, which exposures and carries out a risk analysis. Once these strategic parameters have been validated, the fund gives mandates to fund managers to implement these strategies.

The FDC does not invest directly. It acts through fund managers selected by tender to manage a certain amount--€1bn maximum--for specific asset classes. Take, for example, an investment in global equities, explains Marc Fries, a member of the management committee. “We look for managers who have a track record, an established reputation, experience in the target asset class and the right risk profile. During the tender process, we pay particular attention to operational aspects, reporting and costs. We do a scoring and the mandate goes to the best bidder.” Depending on the mandate--passive or active management--the manager has an obligation to achieve results.

“But with the guidelines we give, the history of the market and the performance of the manager, we can have a fairly accurate view of the level of performance to be expected at the end of the mandate. We monitor this on a regular basis in order to detect possible performance gaps and react.” A reaction can go as far as early termination of the mandate. Monitoring is carried out on a day-to-day or monthly basis by an investment committee and quarterly by the board of directors. To limit risk, the fund diversifies both its mandates and its managers. “For each asset class, we have several managers who may have different investment approaches,” explains Fries.

How is it possible to be better than the market? “There are two explanations: the first is that our managers have done a better job than the market. The second is our strategic allocation, and therefore our current overweighting of equities. This is a decision taken here by the investment committee and the board of directors,” explains Würth. Half of the Fonds de Compensation’s assets are managed actively, the other half passively. Just under half (48%) of the fund’s assets are invested in equities, 45% in fixed-income securities, 3.6% in money market instruments and 3.4% in unlisted property.

For Fries, this strategy is not overly risky. “The value at risk--the amount of losses that should not be exceeded--is 20%. From a return point of view, 48% in equities gives a better return. So does having 50% of assets in active management. Since 2007, we have quantified our risk well.”

Sustainability through targeted exclusion

Although it does not invest directly, the fund has developed an approach to sustainable investment. First, all the managers chosen have been awarded the Luxflag label and all have investment policies that comply with articles 8 and 9 of the Sustainable Finance Disclosure Regulation (SFDR). “And the sustainability criterion is included in the managers’ scoring,” explains Alain Reuter.

“Their approach to sustainability must be clear, consistent and understandable in the long term,” adds Würth. “All managers have an investment strategy in place. They don’t develop it for us. It is thanks to this track record that we can assess how they are going to manage our portfolio.” The FDC does not impose a sustainable investment policy on its managers. It ensures that such an approach exists.

On the other hand, the Fonds de Compensation, together with consultants and external service providers, has drawn up an exclusion list that currently includes 140 companies. In addition, 170 other companies are under observation. To be excluded from this list, companies must be in line with the ESG standards of the OECD and the United Nations in terms of sustainable development. Any company that does not comply with these standards is excluded. Companies under observation with a negative rating for two years will also be excluded. “Companies, not managers,” says Reuter, thinking of Tesla, which, at the end of 2024, was the sixth most represented company in the FDC portfolio.

Tesla has just been excluded from the portfolio of the Dutch pension fund ABP for two reasons: the excessive remuneration of its CEO ($55bn last year) and because of its human resources governance. The FDC has no plans to exclude Tesla for the time being. “Tesla is under neutral observation status.” Despite the excesses of its CEO. “We judge the company, not the man,” explains Reuter, who insists that the FDC “does not have a mission of political criticism.”

“We do not exclude entire sectors or themes from our investment universe. Greenpeace criticised us for this when it listed 1,200 companies excluded by other funds. These exclusions include many thematic exclusions. We exclude companies on the basis of their compliance with international conventions and sustainable development issues. We have excluded companies like Airbus and Boeing because of their involvement in military nuclear programmes. Nuclear power as such is not excluded. And we invest in companies like Shell, in particular via green bonds designed to finance virtuous energy projects.”

The question of impact on performance

The big question is whether investing more and more in products that are linked to sustainability offers better performance.

“This is difficult to estimate,” says Reuter. “It depends on the characteristics of the portfolio and the constraint we give our managers, namely to be in line with the Paris Agreement. We have made a small calculation. With the same expertise, on a given asset class, international equities, there is a difference in performance between a simple mandate and a mandate that requires the managers to be in line with the Paris Agreement.” This difference in performance can be as much as 4% in favour of the virtuous portfolio. This delta is due to a number of factors, including a smaller investment universe and additional costs in terms of analysis and reporting.

This article was originally published in .