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Socially responsible investment

Generalities

The FDC was created with the mission to manage the reserve of the general pension insurance scheme and to draw an effective yield while diversifying risk. Thus, article 248 of the Code of social security provides that:

"The compensation reserve is placed in order to ensure the sustainability of the general pension insurance scheme. In order to ensure the security of investments, account is taken of all assets and liabilities, the financial situation, as well as the structure and foreseeable development of the insurance scheme. Investments must respect the principles of appropriate risk diversification. To this end, the available assets must be distributed between different asset classes as well as between different economic and geographic sectors."

Consequently, during the set-up of FDC's initial investment strategy, a particular attention was paid to all criteria listed above. Other restrictions or limits not arising from FDC's legal mission were not considered.

Nevertheless and since 2010, the FDC has continuously analysed how a socially responsible policy could be incorporated within its investment strategy, whilst complying with the current legal framework. At the beginning of 2011, the set up and implementation of an exclusion list, based on international conventions signed by the Grand Duchy of Luxembourg, was decided. On top of that, sustainable and socially responsible investment criteria will have to be considered in all new requests for proposal launched by FDC.

Since then, the scope and the relevance of the given policy has regularly been reviewed. In 2016, the FDC decided to further strengthen its socially responsible policy which was carried out in the context of a planned investment strategy review early 2017.

Indeed, part of this review specifically concentrated on deepening the consideration of sustainable and socially responsible investment criteria in all future requests for proposal launched by the FDC. More concretely, the review focuses on an analysis of the commitments taken by the Grand Duchy of Luxembourg in connection with the ratification of the agreement of the annual Conference of Parties in Paris (COP21), the 2030 Agenda for sustainable development of the United Nations as well as the creation of new sub-funds dedicated to investments with  "positive impact".

The key concept of the revised socially responsible policy is set out in FDC's directive dated January 2018.

FDC's exclusion list

Since 2011, the FDC is committed to ensure that that its investments through its SICAV comply with the international conventions signed by the Grand Duchy of Luxembourg. More precisely, the implementation of such a principle was put into practice through a normative exclusion of companies and firms not complying with international conventions ratified by the Grand Duchy of Luxembourg in the fields of environment, social responsibility and solidarity as well as institutional responsibility, the latter including human and labour rights.

In this context, FDC's Board of Directors mandated in 2011 the Scandinavian company GES to analyse the authorised investment universe of FDC's SICAV in order to identify all companies and firms not complying with the above mentioned international conventions. Since then, GES provides every six months a report highlighting companies which violate these conventions and which show no willingness to change their policy and their mode of governance. As a result, FDC's Board of Directors excludes these companies from the SICAV's authorised investment universe. Besides this confirmed violations report, the FDC also receives a second report. The report of indication of violations is listing companies that may have violated one or more of these conventions, but with which GES has already started negotiations to stop the condemned practices. Depending on the outcome of these negotiations, the companies in question either are put onto FDC's exclusion list or are taken off the report of indication of violations. By doing so, the FDC supports with its financial weight an engagement process with the aim to change the policy and the mode of governance of the companies in question.

Consideration of sustainable and socially responsible investment criteria

Since 2011, any new request for proposal concerning portfolio mandates on behalf of the SICAV has been including questions about the socially responsible investment or sustainable development policy applied by the tendering companies.

In this context, it can be highlighted that a global equity mandate awarded to NN Investment Partners in 2012 is exclusively managed by considering ESG criteria. The respective sub-fund has been labelled consequently for the third time with the ESG label from the Luxembourg Fund Labelling Agency (LuxFLAG) since 2015. LuxFLAG is a Luxembourgish independent non-profit making association created in July 2006 that aims to promote the mobilization of capital for the responsible investment sector by awarding a recognizable label to investment funds. The main objective of LuxFLAG's ESG label is to reassure investors that their assets are invested by an investment fund integrating ESG considerations throughout its whole investment process.

In addition, the two fund managers in charge of the global real estate sub-funds since 2015 integrate significant environmental, social and governance considerations in their global investment process. This is implemented as well at the level of due diligence prior investment, at the investment selection and decision itself or at the ongoing management and monitoring process after investment. In practical terms this means that the given fund managers ensure that the invested underlying real estate funds have implemented the necessary procedures, systems and expertise to be able to integrate environmental considerations in their real estate investment decisions and real estate detention activities, that they do not engage in socially irresponsible activities and that their rules of governance comply with best practices. In addition to that, the two fund managers have an active voting rights execution policy in place and participate actively in a large number of initiatives, notably by being themselves a GRESB ("Global Real Estate Sustainability Benchmark") member. In this context, the two funds managers are also asking the invested underlying real estate funds to participate in the annual GRESB survey.

The GRESB organization was launched in 2009 with the purpose to provide pension funds with more information on the "greenness" of their investments in real estate. Today, the GRESB survey is de facto used as standard by institutional investors to measure and benchmark the sustainable performance of their real estate portfolios. On annually basis, this survey collects and gathers building related information about commonly used environmental performance indicators such as energy, greenhouse gas emissions, water and waste, as well as broader management issues including for example sustainability risk assessments. Thus, the mentioned questionnaire provides critical data on ESG and sustainable development.

FDC's revised investment strategy of 2017 intensifies and expands the consideration of sustainable and socially responsible investment criteria. This means that for all future requests for proposal regarding actively managed mandates, tendering companies must provide evidence that a sustainable or socially responsible approach is implemented in their offered investment strategy and decision-making processes, this throughout a specific section in the tendering questionnaire with significant weighting. The type, extent and scope of such an approach are not predefined and thus it is up to the tendering company to decide which form of sustainable or socially responsible approach they wish to follow (positive or negative screening, thematic investments, engagement approach, etc.).

Thus, in the context of Fonds de compensation's latest request for proposal launched in 2017, fund managers Amundi AM, Allianz GI, AXA IM and HSBC have been selected to manage five sustainable sub-funds of the SICAV, representing a total strategic value of 3.120 million euros. Together with the existing sub-funds managed by NN IP, CBRE and AVIVA, more than 50% of the actively managed assets of the SICAV are administered according to sustainable or socially responsible investment criteria.

The implementation of sub-funds with "positive impact"

FDC's revised investment strategy of 2017 foresees the implementation of new bond and equity sub-funds dedicated to make investments creating a "positive impact". More specifically, it is planned to launch a sub-fund exclusively investing in green bonds and a sub-fund only investing in companies that intend to generate next to a financial return also a social or environmental impact. The corresponding investments will focus on several of the 17 sustainable development goals of the Agenda 2030 for sustainable development of the United Nations. The request for proposal related to these new mandates has been launched on 10 April 2018.

The FDC, shareholder of the Société nationale des habitations à bon marché

To honour its social commitment in Luxembourg, the FDC is, apart from the Government, the largest shareholder of the Société nationale des habitations à bon marché (SNHBM). The SNHBM is a social property developer specialized in constructing single-family homes and apartment buildings via the acquisition of construction land rent through a long-term lease over a period of 99 years. Upon FDC's initiative and in order to ensure the continuity of the activities of the SNHBM, respectively even to expand its social property developer functions, the shareholders of the SNHBM decided in 2017 a capital increase as it is inconceivable to finance the acquisition of building land exclusively via bank loans over such a long period. FDC's share in the mentioned capital increase amounted to 2.25 million euros.

FDC's direct property assets

Since 2010, all new buildings and all refurbishments initiated by the FDC must be BREEAM ("Building Research Establishment Environmental Assessment Method") compliant and need to achieve at least an energy performance class B. The BREEAM certification is worldwide the most used method to measure and improve the environmental performance of buildings. Indeed, it evaluates the performance of buildings based on management system, energy, health, well-being, pollution, transport, land use, biodiversity, materials and water. Credits are awarded on each of these aspects based on the achieved performance. A weighting system allows an aggregation of the obtained credits and to have an overall score granted in the form of a certificate.

In addition, the electricity supply for all buildings directly managed by FDC is restricted to renewable energy.

Finally, in the agricultural and forestry sector, the FDC owns 649 hectares of forests. These forests are subject to the PEFC label. The "Pan European Forest Certification" label is a forest certification guaranteeing a sustainable, environmentally friendly, socially beneficial and economically viable forest management.

The consideration of environmental and sustainable criteria in terms of direct real estate management have also been set out in FDC's directive 2018.