Financial industry overview
France’s pension system is made up of a public pillar financed on a pay-as-you-go basis, a mandatory occupational system, and voluntary occupational and personal arrangements. The statutory pension insurance scheme is a compulsory basic social security system, which provides earnings-related benefits for employees in the private sector. Private retirement income in France is almost entirely based on compulsory systems. In addition to the basic social system, all employees are members of compulsory supplementary plans. Voluntary occupational pension schemes are still only a small part of the market. The compulsory schemes are known as AGIRC (for executives) and ARRCO (for non-executives), and are based on collective agreements. They offer defined benefit (DB) plans. The AGIRC and the ARRCO schemes merged in 2003. The funds are financed according to the pay-as-you-go system based on employer and employee contributions.
Finally, life insurance products are well developed saving products, offering client attractive tax incentives and contributing to the importance of the insurance industry sector in the country, which represents €2 trillion in assets as of 2015. The French financial industry is made up of more than 1.500 actors. There are nearly 840 asset owners of which 620 are registered with the French Financial Markets Authorities. Most of them are small structures – personal insurance companies, in particular complementary health insurance entities – with limited scopes. The field is completed by a few large asset owners, especially state linked asset owners and insurance companies.
The French asset management industry is the second largest at European level with AuM worth €3.600 billion, and €1.900 billion for discretionary mandates and foreign funds managed at national level.
Characteristics of the SRI market
France remains among the most developed SRI markets in Europe with around 50 Asset Managers and Asset owners. The SRI market has grown significantly over the last two years resulting in an increase of 61.7% in AuM. This growth for the 2013-2015 period has outpaced the 2011-2013 growth of 47.2%.
Insurance companies are the main contributors to this growth as the French SRI market is driven by asset owners who own 90% of assets. ESG integration, in particular, is gaining ground with insurance companies.
Along with the French SIF (FIR), Novethic is a key partner in the Eurosif Study. In 2016, Novethic launched a new Study on the SRI market in France and developed a new methodology to assess SRI approaches in terms of impact (high-impact, significant impact and limited impact).
SRI Market and strategy overview
All Responsible Investment strategies have continued to grow, and two in particular have increased substantially in 2015. Best-in-Class and ESG Integration account for more than €300 billion each.
The French SRI market is traditionally defined by the Best-in-Class approach. The significant growth of 36% can essentially be explained by the major conversions of funds by a few big asset owners and asset managers.
In line with the previous Study, there is still a significant increase in Sustainability themed strategies, as the total amount of sustainability themed assets has increased exponentially, reaching €43 billion in 2015. The COP21 and the reporting obligations arising from Article 173 (see page 73) of France’s Energy Transition law prompted this phenomenon.
This is due to many investors’ engagements to integrate climate-related issues into their investment policy. The most popular theme applied is renewable energy with almost 40%, followed by water management at 25% and energy efficiency at 18%.
ESG integration in financial management covers a broad range of approaches. The Study reviews the assets covering ESG constraints and which totalled €338 billion in 2015.
Cluster munitions and anti-personnel mines exclusion overlays are mandatory by law in France. Hence, they are not included in the Exclusions figures.
Exclusions of weapons, tobacco and the extraction or production of asbestos fibre are being applied by a growing number of investors up to €666 billion, from €473 billion in 2013. This evolution is mainly due to new Exclusions applied by some asset owners.
Moreover, a large number of French asset managers and investors adopted norm-based Exclusions strategies, applied to a large share of their assets, accounting for €2,650 billion in 2015.
Shareholder engagement is becoming formalised in France, especially through stronger requirements from policies of public asset owners. Two trends have been noted:
Voting at general meetings follows a comply or explain rule, which has led to an increase of the voting rate by responsible asset managers, practised by 84% of those surveyed (35% in 2010) for a majority of their shares.
In June 2013,“say-on-pay” was introduced in the AFEPMEDEF Governance Code, encouraging listed companies to let investors vote on executive remuneration at AGMs. In 2016, the French Government introduced a project law in the “SAPIN 2” law that is expected to make the “say-on-pay” vote binding.
Some asset managers conduct engagement activities around specific SRI products but shareholder engagement is mostly conducted by asset owners. The assets covered by such activity represent about €38.5 billion. This figure does not account for engagement activities carried out across various products as such statistics do not exist. The figure is therefore not comparable to other European country data in this Study but tends to indicate that there is ample room in the French market for more engagement.
The French Responsible Investment market was primarily boosted by state-linked asset owners like the French Reserve Fund (FRR), the French civil servants complementary pension schemes (ERAFP and IRCANTEC) and the Caisse des Dépôts. Over the last two years, growth in the French SRI market was again driven by asset owners and specifically by private and mutual insurance companies.
As previously mentioned, institutional investors today hold approximately 90% of SRI assets. Insurers have spearheaded the growth of the French market and represent more than 60% of SRI assets with total AuM of €465 billion in 2015. They have generated 55% of the increase in the volume of Responsible Investment in 2015.
On the individual investors’ side, employee savings saw the strongest growth (+14% in 2015). In total, the assets held by individual investors amounted to €63 billion and accounted for 12% of the SRI market. According to the AFG (the French asset management association), SRI AuM in employee savings rose to €22 billion. Besides employee savings, French retail and high net worth individuals SRI asset saw a timid growth.
Three quarters of SRI assets in the French market are bonds, while shares represent approximately 20% of total assets. This breakdown by asset allocation is linked with the large share of institutional investors in the French SRI market, as the latter are mainly fixed income oriented.
In France, the main innovation in the legal regulatory framework is the Article 173 of the France’s Energy Transition law of August 2015. Asset owners and asset managers are now required to disclose information on their management of climate-related risks, and, more broadly, on the integration of ESG parameters in their investment policies. This regulation is clearly a step forward, and France is the first country to introduce such disclosure requirements. In all likelihood, a few more years may be necessary to measure its impact on asset owners’ practices.
The French Sustainable Investment Forum (French SIF) has published a guidance booklet to support and facilitate the implementation of this article by asset owners. Other associations (asset owners, asset managers, insurers, etc.) also released documents for their members and the French SIF’s publication reflects the singular identity of the association, which brings together asset owners, asset managers, but also rating agencies, brokers, trade unions, consultants, academics, etc.
In France, the context of fund labelling has greatly evolved over the last two years. Two new labels have been introduced in 2015, both supported by the French government. They take over Novethic’s SRI and green labels which stay in effect until the end of 2016. The SRI label was launched by the Minister of Finance in September 2015 during the Responsible Finance Week. The Energy and Ecological Transition for Climate label (so called TEEC) run by the Ministry of Environment was launched during COP21.
For both labels, requirements have been defined and auditors are accredited by a specific body called COFRAC. Asset managers are free to contract with accredited auditors.
The SRI label’s methodological framework introduced an impact dimension through mandatory reporting on at least one indicator in each Environmental Social and Governance pillar. At the beginning, each asset manager will choose indicators they find relevant for each pillar, and then the framework should evolve following best practices. These new requirements complement other transparency and technical requirements. As of today, Afnor Certification and EY France have been accredited to audit and deliver certification to SRI funds. Discussions are on-going for the accreditation of other auditors. First labels were attributed in September 2016 and at least 50 funds should be labelled by the end of 2016. The promotion of the SRI label is ensured by a dedicated committee formed with representatives of French SIF, AFG, the French asset management association and the Ministry of Finance. Label promotion towards the general public started in the autumn of 2016, through the launch of a website and social network communications. This promotion will progressively reach other mass media.
The TEEC label’s methodological framework is based on the Climate Bond Initiative taxonomy to define green investment themes, and requires fund managers to exclude fossil fuels and nuclear power. The investment universe is limited to Europe. TEEC label is open to a wide range of fund types (listed equity, green bond funds, private equity and green infrastructure).
EY France and Novethic have been accredited to audit and deliver certification to green funds. The first certifications were granted in May 2016 and AuM targeted by Minister of Environment, Ségolène Royal is €1 billion by the end of 2016.
The CIES label is delivered by the French CIES (InterUnion Employees Savings Fund Committee), an entity gathering four trade union organisations (CFDT, CGT, CFTC and CFE-CGC). It ensures that the range of funds proposed as part of employee savings scheme are taking into account ESG criteria in their asset management. The range of funds has to fulfil several requirements like socially responsible asset management, fund governance or price level, to obtain the label. Some 15 ranges of funds are CIES-labelled.