France’s Fonds de Réserve pour les Retraites (FRR) has tightened its climate policy by lowering exclusion thresholds for thermal coal and non-conventional fossil fuels as it steps up efforts to align its portfolio with net-zero objectives.

It will also strengthen its shareholder engagement with other companies in the energy sector. This will build on its existing dialogue with companies and asset managers, where it already engages in dialogue to encourage responsible and transparent practices.

As a signatory to the Principles for Responsible Investment (PRI) since 2006 and a member of the Net Zero Asset Owner Alliance (NZAOA), the fund already integrates environmental, social and governance (ESG) criteria into all its investment decisions, but its new policy will go further.

In regard to thermal coal, FRR is committing to excluding any financing or investment in new capacity related to energy production, the refurbishment of coal-fired power plants, or any other infrastructure dedicated to thermal coal.

“The FRR seeks to exclude all financial instruments issued by companies whose activities in thermal coal extraction or in the production of electricity, heat or steam from coal, or related infrastructure, exceed one per cent (1 per cent) of their revenue,” it said, but outlined several exceptions.

The FRR sets a threshold of 10 per cent of company revenue generated from non-conventional fossil fuels, as well as any new non-conventional fossil fuel projects; anything above this would usually result in exclusion. However, it has several exceptions to support the decarbonisation of the real economy and companies in high-carbon-intensity sectors.

For example, its investment managers are allowed to invest in companies exceeding the exclusion thresholds for non-conventional fossil fuels and/or thermal coal if the instrument is a green bond, the company has a decarbonisation plan aligned with a credible Net Zero 2050 scenario and validated by the SBTi; or if it plans to sell or close the relevant activities within 12 months, enabling it to fall back below the revenue threshold.

In terms of conventional fossil fuels, the fund aims to engage with companies involved in conventional fossil fuels, directly or via its asset managers, taking into account both scientific recommendations to limit global warming in line with the Paris Agreement and the interim need for fossil fuels for economic and energy security reasons.

“The FRR commits to further evolving its climate policy in the future to encourage companies in the sector to develop and implement a decarbonisation plan compatible with a Net Zero 2050 scenario, in line with its commitments and its membership of numerous ESG and climate initiatives,” it stated.

Its latest commitment in this area also aligns with Article 29 of France’s Energy and Climate Law, a voluntary disclosure framework encouraging investors to report on climate- and biodiversity-related risks, of which FRR complies with.

As part of this, a gradual exit plan for coal and non-conventional hydrocarbons must be published, specifying the chosen exit timetable and the share of total assets managed or held by the entity covered by these policies.

“To limit the average increase in global warming to 1.5°C, as targeted by the Paris Agreement, and according to the International Energy Agency (IEA) scenario, all thermal coal activities must be fully phased out in OECD countries by 2030 and worldwide by 2040. This exclusion timeline is aligned with our membership of the NZAOA,” FRR stated.

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