REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL on the common provisioning fund in 2021
Date: 2022-05-16
Institutions: Directorate-General for Budget, European Commission
Subjects: EU budget, European Commission, budgetary reserve (EU), financial management, fund (EU), investment, multiannual financial framework

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 16.5.2022  COM(2022) 213 final  REPORT FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL on the common provisioning fund in 2021 {SWD(2022) 143 final}  
 
 
Table of Contents 

INTRODUCTION ........................................................................................................................................ 2 

1. 
SECTION I ........................................................................................................................................ 4 
1.1.  Role of the CPF ................................................................................................................................... 4 
1.2.  Architecture and provisioning of the CPF .......................................................................................... 5 
1.3.  Key milestones in 2021 ....................................................................................................................... 5 
1.4. 
Financial statements of the CPF as at 31 December 2021 .................................................................. 6 
1.5.  Guarantee calls and payment claims ................................................................................................... 6 
Effective provisioning rate .................................................................................................................. 6 
1.6. 

2. 
SECTION II ...................................................................................................................................... 8 
Investment strategy ............................................................................................................................. 8 
2.1. 
2.2.  Composition and characteristics of the portfolio ................................................................................ 9 
2.3.  CPF performance in 2021 ................................................................................................................. 10 

SECTION III ................................................................................................................................... 12 
3. 
Investment universe diversification .................................................................................................. 12 
3.1. 
3.2. 
Inclusion of environmental, social and governance (ESG) factors in the CPF benchmark .............. 12 
3.3.  Conclusions ....................................................................................................................................... 13 

 
 
 
 
 
 
 
INTRODUCTION 

This  report  is  the  first  annual  report  on  the  common  provisioning  fund  (CPF)1,  for  the  period 
from 1 January 2021 to 31 December 2021. 

The CPF holds the provisions protecting the EU budget against losses which may arise in respect 
of operations supported by financial instruments, budgetary guarantees or financial assistance for 
third countries established by different EU legislative instruments.2 

The  CPF  was  constituted  in  January  2021.  At  the  end  of  2021  its  market  value  stood  at 
EUR 12.31 billion, making it by far the largest portfolio directly managed by the Commission.3 

The  CPF  is  the  capital  reserve  from  which  funds  are  drawn  to  meet,  fully  and  promptly,  all 
required  outflows  and  guarantee  calls  stemming  from  the  financial  instruments,  budgetary 
guarantees and provisioned loan programs. In order to serve as a reliable buffer for these calls, 
the  CPF  is  managed  in  a  way  that  should,  at  least,  strive  for  capital  preservation  over  its 
investment  horizon  (9  years)4.  Macroeconomic  volatility  which  negatively  impacted  the  fund’s 
results in 2021 presents new challenges for delivering this objective in the short-term. 

This report outlines key developments related to the functioning of the CPF in 2021, presents it 
financial  and  investment  characteristics  against  the  prevailing  market  situation,  as  well  as 
describes  forward-looking  actions  that  the  Commission  intends  to  take  drawing  on  the  lessons 
learned from the first year of the fund’s operation. It is focused on the asset management aspects; 
contingent liabilities will be discussed in the report under Article 250 of the Financial Regulation 
(FR). 

1 

Pursuant  to  Article  214  of  the  Financial  Regulation  (Regulation  (EU,  Euratom)  2018/1046  of  the 
European Parliament and of the Council of 18 July 2018 on the financial rules applicable to the general 
budget  of  the  Union,  amending  Regulations  (EU)  No  1296/2013,  (EU)  No  1301/2013,  (EU)  No 
1303/2013, (EU) No 1304/2013, (EU) No 1309/2013, (EU) No 1316/2013, (EU) No 223/2014, (EU) 
No 283/2014, and Decision No 541/2014/EU and repealing Regulation (EU, Euratom) No 966/2012, 
OJ L 193, 30.7.2018, p. 1, the Commission shall report annually to the European Parliament and to the 
Council on the common provisioning fund. The asset management guidelines of the CPF (Commission 
Decision  of  25.3.2020  on  the  Asset  Management  Guidelines  of  the  common  provisioning  fund 
(C(2020) 1896 final, OJ C 131, 22.4.2020, p. 3–11) provide further guidance on the contents of this 
report. 

2  Article 212 FR. 

3  The other portfolios, with a combined value of EUR 6 billion include ECSC, BUFI, PGF, RCAM and 

PL01. 

4  Article 2(1) of the AMGs. 

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The report consists of three sections: 

– 

– 

– 

Section I presents the role and structure of the CPF, as well as key developments related to 
its  functioning  during  2021.  It  also  presents  an  overview  of  calls  on  guarantees  and 
transactions, as well as information on the level of the effective provisioning rate. 
Section II is focused on the portfolio’s composition, risk profile and performance in 2021 
presented against the benchmark, as well as its environmental, social and governance (ESG) 
profile. It also describes the market environment and developments  that shaped the fund’s 
performance in 2021. 
Section III presents lessons learned over the first year of operation of the fund and outlines 
the  steps  the  Commission  intends  to  take  to  ensure  value  protection  and  growth 
opportunities of the CPF over the longer term. 

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1.  SECTION I 

1.1.  Role of the CPF 

During  the  current Multi-Annual  Financial  Framework  (MFF  2021-2027),  the  EU  budget  must 
respond  to  environmental,  strategic  and  socioeconomic  challenges.  Budgetary  guarantees  have 
proven to be a viable means to multiply the policy impact of limited public finance already under 
the previous MFF, and the Commission has expanded their use to support investment. This logic 
underlies  initiatives  such  as  the  European  Fund  for  Strategic  Investments  (EFSI)  and  the 
InvestEU programme. 

The use of guarantees has also been extended into the external sphere through the European Fund 
for  Sustainable  Development  Plus  (EFSD+)  under  the  External  Action  Guarantee  (EAG) 
established by the NDICI Regulation5. EAG consists of a mix of guarantees and guaranteed loans 
for  investments  and  macro-financial  assistance  in  pre-accession,  neighbouring  and  other 
countries.  

At  the  end  of  2020,  the  EU  budget  covered  contingent  liabilities6  amounting  to  approximately 
EUR 63  billion  for  the  guarantees  provided  in  the  context  of  EFSI,  European  Fund  for 
Sustainable Development (EFSD), and external lending mandate (ELM). 

Under the current MFF the use of budgetary guarantees is expected to further increase through, 
inter alia, the InvestEU programme, which establishes EUR 26.2 billion of contingent liabilities7 
to support investment that contribute to objectives of the Union’s internal policies.  

The CPF was established to manage the provisioning of financial liabilities made available by the 
EU  budget,  so  that  these  can  be  released  when  required  to  meet  any  losses  incurred  through 
defaulting operations8. The CPF constitutes a large asset pool on which the Commission can draw 
to  swiftly  honour  the  required  outflows  and  guarantee  calls.  It  is  divided  into  several 
compartments, which correspond to the financial liabilities under the respective instruments and 
programmes.  

Under Title X of the Financial Regulation the Commission is entrusted as financial manager with 
particular responsibilities for setting up the CPF, defining its investment strategy and overseeing 
its sound management 

5  Regulation (EU) 2021/947 of the European Parliament and of the Council of 9 June 2021 establishing 
the  Neighbourhood,  Development  and  International  Cooperation  Instrument  –  Global  Europe, 
amending and repealing Decision No 466/2014/EU of the European Parliament and of the Council and 
repealing  Regulation  (EU)  2017/1601  of  the  European  Parliament  and  of  the  Council  and  Council 
Regulation (EC, Euratom) No 480/2009, OJ L 209, 14.6.2021, p. 1. 

6  Contingent  liabilities  are  potential  financial  liabilities  of  the  EU,  which  stem  from  existing  binding 
commitments  or  past  events.  Whether  or  not  they  will  lead  to  actual  losses  will  depend  on  future 
events not wholly under the control of the EU. 

7  More  information  on  budgetary  guarantees  and  contingent  liabilities  is  available  in  the  Working 
Document Part XI of the General Budget of the European Union (COM(2021)300) and report under 
Article 250 FR (COM(2021)676 final). 

8  CPF underpins the system of various forms of support that the EU will provide under the current MFF, 
notably  InvestEU  and  EFSD+.  The  CPF  also  accumulates  assets  of  legacy  contributing  instruments 
under the previous MFFs (EFSI, EFSD, Guarantee Fund for external actions (GFEA)). 

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1.2.  Architecture and provisioning of the CPF 

The CPF is created and functions as a single internal pooled portfolio with a single investment 
strategy, separate from the other portfolios managed by the Commission. Any generated gains are 
reinvested. 

The  resources  of  the  CPF  are  accounted  for  in  compartments  for  the  purpose  of  tracing  the 
amounts  relating  to  the  various  contributing  instruments9.  This  is  necessary  to  ensure  that  the 
corresponding  instrument  is  allocated  its  share  of  resources  and  any  returns  or  losses 
proportionate  to  assets  owed.  The  costs  of  defaulting  operations  are  assigned  to  the  respective 
compartments.  In  case  one  CPF  compartment  is  exhausted,  another  compartment  can  be 
temporarily drawn on and replenished later. 

On 31 December 2021 the CPF was composed of four compartments (EFSI, EFSD, GFEA10 and 
InvestEU). In 2021 it received EUR 12.44 billion net contributions. As at 31 December 2021 the 
market value of the outstanding shares was EUR 12.31 billion, which is equal to the value of net 
assets. 

Over  the  period  2022-2030,  the  CPF  is  expected  to  receive  an  additional  EUR 19.3  billion  in 
inflows  from  the  contributing  instruments,  with  annual  inflows  of  EUR 1  to  3  billion.  These 
inflows may be offset by outflows to meet guarantee calls and eligible costs. The CPF is expected 
to reach a size in excess of EUR 20 billion by 2026-2027. 

The  evolution  of  the  portfolio  is  presented  in  more  detail  in  the  staff  working  document 
accompanying this report. 

1.3.  Key milestones in 2021 

Following the adoption of asset management guidelines (AMGs), the Commission swiftly put in 
place  all  legal,  administrative  and  technical  arrangements,  including  the  creation  of  accounts, 
definition  of  the  investment  strategy,  setting  the  benchmark  and  risk  limits.  CPF  commenced 
operations on 1 January 2021 upon receiving the transfer of the EFSI guarantee fund portfolio11. 
The first inflows from MFF 2021-2027 resources were received on 30 June 2021 with the first 
instalment  of  InvestEU  provisioning.  On  1  August  2021,  the  provisions  for  EFSD  and  GFEA 
were  smoothly  transferred  to  the  CPF.  The  transfer  of  the  GFEA  portfolio  was  a  complex 
operation  requiring  smooth  coordination  with  its  previous  manager,  the  European  Investment 
Bank. 

The technical and operational infrastructure for the CPF is now well established and road-tested. 
It  is  ready  for  further  contributions  and  opening  of  new  compartments,  when  provisions  are 
transferred by the contributing instruments. 

9  According  to  Article  3  of  the  AMGs,  the  resources  of  the  CPF  are  allocated  into  compartments 

corresponding to each of the contributing instruments as outlined in Article 1 of the AMGs. 

10  Guarantee Fund for external actions (GFEA), holding the provisions for ELM, MFA (macro-financial 

assistance) and Euratom programmes  

11  The  details  of  the  preparatory  phase,  as  well  as  explanations  of  the  structure  and  functioning  of  the 
fund,  were  presented  to  the  European  Parliament  and  the  Council  in  the  Communication  from  the 
Commission on the entry into operation of the Common Provisioning Fund (COM(2021)88 final). 

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1.4.  Financial statements of the CPF as at 31 December 2021 

The net assets of the CPF stood at EUR 12.31 billion as at 31 December 202112. As per current 
investment strategy (see section 2.1), the main assets comprised the securities portfolio investing 
mainly in investment grade bonds (sovereign, SSA13, corporate, financial), classified as fair value 
through surplus or deficit (EUR 11.27 billion) and cash and cash equivalents (EUR 1.03 billion). 

In  terms  of  the  2021  statement  of  financial  performance,  the  CPF  ended  the  year  with  an 
economic  result  of  EUR -133.3  million.  The  CPF  performance  and  its  macroeconomic  context 
will be further discussed in the next two sections. 

More  information  on  the  financial  statements  is  available  in  the  staff  working  document 
accompanying this report. 

1.5.  Guarantee calls and payment claims 

The liquidity management of the guarantee calls and payment claims is built around the concept 
of a liquidity buffer, as provided for in the AMGs. The liquidity buffer is constituted by limited 
reserves of cash held at the Commission’s Central Treasury to cover the expected imminent cash 
outflows of the CPF contributing instruments. Out of a total amount of EUR 165 million held by 
the buffer14, a net amount of EUR 73.5 million was paid out in 2021. The remaining balance of 
the liquidity buffer amounted to EUR 91.5 million at the end of 2021. 

These 2021 calls on the CPF provisions by the respective budgetary guarantees, as well as other 
demands on the resources held by CPF compartments, can be summarized as follows15: 

 
 

 

no calls have been made under the EFSD guarantee; 
guarantee calls of EUR 66.5 million were paid under the ELM guarantee. In addition, there 
were minor operational expense for an amount slightly lower than EUR 0.1 million; 
the  net  consumption  of  the  EFSI  guarantee  amounted  to  EUR 6.9  million,  including  net 
positive  value  adjustments  of  equity  portfolios  of  EUR 7.6  million,  a  cash  outflow  of 
EUR 11.1  million  linked  to  the  hedging  of  foreign  currency  exposures,  a  cash  outflow  of 
EUR 0.9 for SME Window guarantee call, and expenses of EUR 2.5 million. 

1.6.  Effective provisioning rate 

Each CPF compartment contains assets provisioned from the EU budget, which are held against 
the  contingent  liabilities  incurred  by  the  corresponding  budgetary  guarantee  instrument.  Those 
provisions represent a percentage of the contingent liabilities as foreseen in the legislative act16. 

Not all CPF compartments will experience guarantee calls of the same intensity at the same time. 
This inherent diversification in time and amount of calls on the different compartments allows the 

12  All values are presented on a fair value basis. 

13  Sovereigns, Supranational and Agencies 

14  The liquidity buffer is held outside the CPF. It comes on top of the cash and cash equivalents (EUR 

1.03 billion) held in the CPF. 

15 

It  is  important  to  mention  that  payments  may  arise  in  2022  or  later  which  may  require  ex  post 
adjustment of 2021 accounts. 

16  Those  provisions  cannot  fall  below  a  percentage  fixed  by  the  legislative  instrument  establishing  the 

budgetary guarantee or the guarantee is deemed to be under-provisioned. 

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aggregate  CPF  provisions  (for  all  compartments)  to  be  reduced  below  the  amount  that  would 
result from summing up the provisions of the different compartments when calculated separately.  

This diversification effect is recognised by Article 213 FR, which allows the Commission to set a 
level  of  “effective  provisioning  rate”  (EPR),  which  is  lower  than  that  resulting  from  simple 
addition  of  the  separately  calculated  provisions.  The  EPR  reflects  the  share  of  the  aggregate 
provisions of the CPF compartments to be kept in the fund, after the diversification effect. The 
EPR is expressed as a percentage, floored at 95%, and calculated as a ratio between: 

 
 

the amount of cash and cash equivalents in the CPF required to honour guarantee calls, and 
the total amount of cash and cash equivalents that would be required in each guarantee fund 
to honour guarantee calls, if the resources were held and managed separately. 

The  EPR  is  calculated  annually  based  on  the  observations  of  the  correlation  between  expected 
calls17 on different compartments and applies only to the resources in the CPF envisaged for the 
payment of guarantee calls on a one-year horizon.  

When calculating  the  EPR  for the  first time  in  2021,  the  Commission  was confronted  with the 
fact that EFSI was the only active compartment in the CPF for the first half of 2021 and by far 
the largest instrument in the CPF throughout the year. This eliminates the scope for any cross-
compartment diversification. Consequently, the EPR for 2021 was set at 100%18. 

17  The  risk  metrics  for  the  different  programmes  are  produced  officially  once  a  year.  This  implies  an 

annual frequency for the EPR calculation. 

18  Commission  Delegated  Decision  (EU,  Euratom)  C(2020)7684  supplementing  Regulation  (EU, 
Euratom) 2018/1046 of the European Parliament and of the Council  with detailed conditions  for the 
calculation of the effective provisioning rate of the common provisioning fund, OJ L 42, 5.2.2021, p. 
9–12. 

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2.  SECTION II 

2.1.  Investment strategy 

The AMGs stipulate that the fund should deliver capital preservation over its investment horizon, 
with  a  high  level  of  confidence.  This  objective  is  pursued  through  implementation  of  a  single 
investment  policy,  framed  by  reference  to  a  benchmark/comparator  portfolio,  which  embodies 
the level of risk that the CPF is willing to bear. 

The AMGs set out the general principles which guide the process for constructing a benchmark 
portfolio, building on relevant indices of bond market performance. This benchmarking process 
guides the selection of assets which are held by the CPF portfolio.  

On this basis, the day-to-day decisions on asset selection are guided by a clear reference, which 
limits  the  danger  that  the  portfolio  assumes  too  much  risk.  It  is  this  investment  policy  and 
benchmarking  process  that  has  led  to  the  current  asset  composition  of  the  portfolio,  and  the 
resulting  risk/return  profile.  Notably,  the  bulk  of  the CPF  (and  the  legacy  portfolios  that it  has 
absorbed  from  EFSI  and  EFSD)  has  to  date  been  restricted  to  investment  in  euro-  and  USD-
denominated  investment-grade  fixed  income  securities  (bonds)  issued  by  EU  Member  States, 
international  financial  institutions  or  sub-sovereign  bodies,  banks,  corporates,  as  well  as  to 
mortgage-backed (covered) bonds. 

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Governance structure 

The Commission has set up the asset management governance for the CPF based on the best 
practice  in  asset  management  and  benchmarking  with  peer  institutions.  The  asset 
management framework involves the following main actors: 

 

 

 

the Financial Manager of the CPF takes final responsibility for the decisions related to 
the financial management of the resources of the CPF, as well as for the other portfolios 
managed by the Commission or outsourced to the European Investment Bank. This role 
has  been  delegated  by  the  Commission  to  the  Director-General  of  the  Directorate-
General for Budget; 
the  Accounting  Officer  exercises  independent  control  and  oversight  of  the  activities 
relating to asset management of the CPF. In addition, the accounting officer sets up the 
procedures to be applied to the revenue and expenditure operations and to the accounting 
of the assets and liabilities; 
the  Compliance  Officer  provides  independent  scrutiny  of  adherence  to  agreed 
procedures and advises on new or significant legal or procedural issues. 

The  decisions  taken  by  the  Financial  Manager  and  agreed  by  the  Accounting  Officer  are 
based on rigorous preparation, organised through the Asset Management Board and its sub-
structures  (risk  and  investment  committees),  which  propose  courses  of  action  for 
endorsement. 

2.2.  Composition and characteristics of the portfolio 

The CPF portfolio at the year-end is well diversified within the fixed income universe in terms of 
types of bonds. In addition, it is diversified in non-euro denominated securities (USD) in the form 
of  an  allocation  to  US  Treasuries  and  other  issuers  (e.g.  Supranational,  other  Sovereigns  or 
Agencies), and cash. Currency gains or losses on non-euro securities are being largely offset by 
opposite changes of foreign exchange derivatives used as hedges.  

Credit quality of assets owned 

The  credit  quality  of the  CPF  portfolio is  high,  with an  average  rating  of  A-,  suggesting  a  low 
default probability (0.07% at 1-year horizon).  

Over  26.8%  of  the  market  value  of  the  portfolio  is  invested  in  AAA  securities,  of  the  highest 
quality, and the rest is well distributed across the whole spectrum of the investment-grade scale. 
Only 2.3% of the portfolio is sub-investment grade, and relates to Greek government bills with a 
maturity  of  less  than  one  year.  There  is  also  8.2%  of  cash  or  cash  equivalents.  The  above 
mentioned  AAA  category  of  26.8%  otherwise  includes  for  example  securities  issued  by 
sovereigns  such  as  the  German,  Dutch  and  US  Government,  supranationals  like  the  European 
Investment Bank, European Stability Mechanism, agencies like KfW, and covered bonds issued 
by prominent financial institutions.  

USD-denominated investments (such as US Treasuries) represented 5.1% of the portfolio market 
value as at 31 December 2021. The currency risk of USD-denominated investments was hedged 
via forward contracts.  

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Liquidity characteristics of the portfolio 

About 26% of the portfolio consists of bonds with a  maturity below 1 year, floating rate notes 
and short-term money  market instruments and cash which provide a further liquidity buffer for 
the portfolio. This means that portfolio is well equipped to respond to guarantee calls. 

Environmental, social and governance (ESG) footprint 

The share of ESG-labelled bonds19 was 13.4% at the end of 2021 compared with 9.5% at the end 
of  2020.  This  strong  ESG-focus  evolved  through  a  proactive  approach,  which  privileged 
investments in  ESG-labelled  bonds  over other bonds. 22.9%  of  the  ESG-labelled  assets  had  an 
AAA  rating,  while  the  lowest  rated  asset  class  (BBB-)  corresponded  to  0.2%.  Section  III  will 
further  explain  how  the  Commission  intends  to  reinforce  the  ESG  footprint  in  new  investment 
strategy for the CPF. 

2.3.  CPF performance in 2021 

As  explained  above,  the  CPF  is  a  liquid  and  well  diversified  bond  portfolio.  While  investing 
exclusively  in  highly  rated  debt  instruments  has  served  the  Commission  portfolios  well 
historically, it reached its limits during 2021 when a long period of monetary policy easing came 
to an end. 

The  first  year  of  the  CPF’s  operations  coincided  with  an  exceptionally  challenging  market 
environment  for  fixed  income  investment,  impacting  negatively  the  valuation  of  the  fund’s 
securities. 2021 was the worst year for bond markets since 1999, with global bond market indices 
and  euro-denominated  bond  market  indices  declining  respectively  by  4.7%  and  2.85%20.  This 
outcome was driven by higher inflation prompting market expectations of tightening of monetary 
policy  by  central  banks.  Consequently,  the  CPF  return  was  also  negatively  impacted,  although 
remaining  in  line  with  its  benchmark  and  far  surpassing  the  broader  bond  market  evolution. 
These  changes  in  the  market  environment,  and  their  impact  on  bond  investment  returns  are 
described briefly below. 

The  pronounced  upward  shift  in  European  and  U.S.  yield  curves  in  2021  explains  the  CPF’s 
negative  annual  absolute  performance  of  -1.17%21.  This  return  is  in  line  with  the  annual 
performance of the CPF benchmark (-1.13%)22. 

19 

In  assessing  whether  bonds  are  classified  as  ESG-labelled  for  the  purposes  of  CPF  allocation,  the 
Commission relies on the published assessment of the ‘use of proceeds’ of the asset in question by the 
analytics and data providers which the Commission uses for its asset management function. 

20  The Barclays Global Aggregate Bond Index, a broad benchmark representing USD 68 trillion worth of 
sovereign  and  corporate  investment  grade  (IG) debt denominated  in  various  currencies,  lost  4.7%  in 
2021.  The  Bloomberg  Euro-Aggregate,  a  EUR 13.4  trillion  broad  benchmark  of  euro  denominated 
investment grade debt posted a record loss of 2.85% in 2021. 

21  The  risk  management  performance  does  not  include  some  minor  costs  like  custodian  fees.  This 

explains the 2 bps difference with the accounting performance (-1.19%). 

22  The annual performance is calculated using market prices (mark-to-market) and a time-weighted basis 

in order not to be affected by any change in the size of the portfolio, due to inflows or outflows. 

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Market developments in 2021 

Market developments in 2021 were dominated by the pandemic, vaccination campaigns, and 
the  overall  strong  economic  recovery,  which,  however,  was  accompanied  by  rising 
inflationary pressures and geopolitical instability. 

Governments  and  central  banks  maintained  very  accommodative  policies  in  2021,  but 
forward looking expectations about the policy path changed over the year, especially due to 
inflation that turned out to be much more pronounced. Fuelled by a steady increase in energy 
prices  and  widespread  supply  chain  bottlenecks,  inflation  reached  multi-decade  highs 
towards the end of the year (5% in Europe and 7% in the USA). In response, central bank 
communications and forward guidance changed as the year progressed and expectations for 
interest rate hikes were gradually moved forward by the market participants. 

While  the  ever-changing  landscape  of  infections  and  restrictions  kept  market  volatility  at 
elevated  levels,  the  combination  of  higher  inflation  and  expectations  of  tighter  monetary 
policy pushed bond yields in an overall upward trend. As they move inversely to yields, bond 
prices fell  and  thus  valuations  suffered  significantly.  This  was  exacerbated  by  the  fact  that 
the  income  bonds  offer  hardly  provides  any  cushion  to  returns,  given  the  low,  and  mostly 
negative, yields offered by the high quality and liquid securities the CPF is invested in. 

The return of the CPF benchmark in 2021 (-1.13%) was also negatively impacted by the upward 
movement of the yield curves. Its return falls within the expected range of return23. 

Nevertheless, as discussed in Section III, a review of the CPF benchmark is expected in 2022 to 
include new asset classes and improve the expected returns of the CPF benchmark over the long 
run. 

23  With an expected annual return of  -0.15% and an expected volatility of  -1.12%, the annual return of 
the CPF benchmark should be within a range comprised between -1.27% and +0.97% in 68% of cases. 

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3.  SECTION III 

3.1.  Investment universe diversification 

The negative performance of the CPF in 2021 highlights the risks of investing exclusively in one 
asset class (fixed income). The outlook for fixed income portfolios remains challenging, possibly 
for several years, given the still low levels of yields and the resurgent inflation concerns. 

To enhance the longer-term performance of the portfolio, the Commission intends to expand the 
investment  universe  of  the  CPF  beyond  fixed  income  investments,  within  the  limits  of  the 
existing AMGs. 

The  results  of  the  in-depth  analysis  of  the  risks  and  returns,  as  presented  in  more  detail  in  the 
staff  working  document  accompanying  this  report,  showed  the  benefits  that  further  asset  class 
diversification can bring over the longer term. It would allow to mitigate against over-exposure to 
low yielding fixed income assets.  

While risk would increase to some extent, a limited equity exposure of up to 20% of the portfolio 
would  remain  consistent  with  the  risk  tolerance  of  the  CPF  and  would  enhance  the  expected 
average return per unit of risk. 

Exposure  to  equity  can  be  built  gradually  through  investments  in  Exchange  Traded  Funds 
(ETFs), which offer cost-efficient diversified exposure to broad stock indices. These indices are 
essentially  baskets  of  stocks  of  major  companies,  across  a  broad  range  of  sectors  and 
geographical  regions.  As  such,  ETFs  offer  broader  exposure  to  the  targeted  stock  markets  and 
mitigate the idiosyncratic risk from investing into the stocks of a few companies. 

The Commission would seek to finalise all preparations for investment in equity ETFs by autumn 
2022, depending on the completion of a number of necessary technical and operational processes. 
Such  investment  would  be  progressively  built-up,  taking  into  account  market  conditions  and 
valuation levels – possibly through the investment of new inflows to the CPF. 

3.2.  Inclusion of environmental, social and governance (ESG) factors in the 

CPF benchmark 

The AMGs already include negative screening criteria, such as the exclusion of bonds related to 
the  activities  involving  gambling  or  tobacco.  In  addition,  the  AMGs  require  that  the  CPF 
integrates ESG considerations. Currently, the CPF portfolio has a large exposure to ESG-labelled 
securities (see also footnote 19), significantly larger than its benchmark (13.4% for the portfolio 
vs. 4.5% for the benchmark as of end of 2021). However, the Commission wishes to put the ESG 
policy for the CPF on a firmer footing and include the ESG footprint in the updated version of the 
benchmark.  

In order to do so, it is envisaged to add an ESG tilt to the CPF benchmark to be updated due to 
implementation  of  the  investment  universe  diversification,  so  as  to  provide  a  reliable  point  of 
comparison for the portfolios with the same objectives and attributes as the CPF. Remodelling of 
CPF investment benchmark can also provide for the opportunity to integrate ESG considerations 
more systematically. The share of ESG securities in the portfolio is expected to grow further in 
the  future,  supported  by  a  benchmark  with  explicit  ESG  characteristics.  Future  annual  reports 
will present the implementation of the ESG profile of the CPF. 

There  is  strong  economic  evidence  that  markets  have  recently  begun  to  favour  ESG-sensitive 
investments.  The  Commission  presents  itself  as  a  leader  among  political  bodies  who  promote 

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environmental  and  sustainable  practices,  thus  it  is  opportune  to  use  this  diversification 
opportunity to closer align our investment strategy with the political priorities. 

3.3.  Conclusions 

The  first  year  of  operation  of  the  CPF  was  marked  by  smooth  establishment  of  the  necessary 
operational,  technical  and  accounting  facilities,  as  well  as  successful  transfers  of  existing 
portfolios into CPF compartments. 

The  CPF,  currently  holding  EUR 12.31  billion  in  assets,  constitutes  a  robust  capital  buffer  for 
budgetary  guarantees  and  provisioned  loans  to  third  countries.  No  operational  risk  events 
occurred in 2021, as all guarantee calls were met and accounts were finalised on schedule. 

The vast majority of the CPF assets are investment grade bonds or cash, which forms a sufficient 
liquidity  cushion.  However,  a  turn  in  the  interest  rate  cycle,  which  has  increased  yields  while 
decreasing  bond  prices, has  significantly  impacted  this type  of liquid assets. The  2021  was  the 
worst year for the bond investors over more than 20 years24. 

Faced with these challenges, the Commission intends to further strengthen the CPF’s resilience. 

The Commission aims towards expanding CPF investment universe and thus mitigating against a 
single-asset-class-exposure risk. Internal analysis (see staff working document) has shown that a 
limited and progressive rebalancing of CPF to include up to 20% exposure to equity can have a 
significant  positive  impact  on  long-run  expected  earning,  while  only  marginally  increasing  the 
risk.  This  work  shows  that  a  diversified  portfolio  (including  up  to  20%  equity)  has  expected 
returns  of  1.6%,  while  a  portfolio  with  an  exposure  only  towards  fixed  income  assets  has 
expected returns of 0.7%. 

The diversification project is also an opportunity to simultaneously structure the Commission’s 
approach towards increasing its investing in ESG-labelled assets in order to address its political 
priorities of green and sustainable growth. The current organic approach of favouring ESG assets 
has  already  made  the  CPF  the  most  ESG-oriented  of  all  the  portfolios  managed  by  the 
Commission.  By  integrating  ESG  considerations  more  systematically  into  the  benchmark,  the 
ESG orientation of the CPF can be more actively steered. 

As this report is being drafted in early 2022, the portfolio and benchmark performance continues 
facing  pressure  as  yields  and  uncertainty  have  overall  risen  further,  amidst  rising  inflation, 
expected tightening of monetary policy and the invasion in Ukraine. On the other hand, assets are 
now  being  invested  in  bonds  with  positive  yields  which,  if  sustained  over  time,  will  help  to 
recover recently experienced losses. The recent period, marked by a strong shift in interest rate 
expectations, represents the  phase  in  which  CPF  asset  valuation is  at its  most  vulnerable.  Over 
the next 2-3 years, the losses incurred in the recent past are likely to be reversed, barring further 
market  shocks.  However,  the  experiences  of  a  tumultuous  2021  underline  the  limits  of  an 
investment policy confined to a single asset class (bonds), no matter how prudently the assets are 
selected. 

24 

’Global bond markets on course for worst year since 1999’, Financial Times (ft.com), 25.12.2021. 

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