France’s pension reserve fund is ramping up its allocation to equities after the government gave it permission to invest beyond 2033.
Under rules adopted during the coronavirus pandemic, Fonds de réserve pour les retraites (FRR) has liabilities lasting until 2033, but the €21.2bn fund said its assets could now “continue to be managed on a long horizon”.
The increased allocation to equities is part of a new strategic asset allocation that FRR adopted last month, with the fund saying that preparatory work for this highlighted the importance of relying even more heavily on equities and ‘intermediate risk assets’, “whose expected risk-adjusted return far exceeds that of investment grade bonds over the long-term”.
In 2024 FRR is due to allocate 41.5% of its assets to unhedged equities. This is a nine percentage point increase, it said, with a reduction of the same magnitude planned for the allocation to investment grade bonds, to 21%. The allocation to ‘intermediate risk’ assets (including high yield) is set at 37.5%, which compares with 38.7% at the end of 2023.
FRR said it estimates the extension of the investment horizon will increase the fund’s value creation by on average more than €1.8bn by 2033 compared with the previous trajectory, equivalent to a 14% increase.
It said the new asset allocation would allow FRR to continue to invest in the French economy, in particular unlisted assets, in keeping with its mission to “invest to create sustainable value for the major public challenges of tomorrow”.
The new strategic asset allocation will be implemented with respect to FRR’s responsible investment strategy, which was revised in December to reinforce its climate policy, in particular concerning exclusions.
FRR has committed to striving for a net-zero investment portfolio by 2050, as a member of the UN-backed Net-Zero Asset Owner Alliance (NZAOA). The decisions adopted in December mean that its action plan for 2024-2028 includes tighter criteria for coal and unconventional fossil fuels such as oil sands.
From this year, FRR will exclude companies if 5% or more of their turnover stems from thermal coal extraction or coal-based electricity production, compared with 10% previously. For unconventional fossil fuels, the exclusion threshold is 20%.
Exceptions will be made for green bonds and companies that have a 1.5°C-aligned plan to exit those activities.
FRR also said it would be continuing its engagement activity either via collaborative initiatives such as Climate Action 100+ or NZAOA, or directly with those companies that have the biggest impact on the carbon footprint of FRR’s portfolio.
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