Japan’s Government Pension Investment Fund (GPIF), the world’s biggest retirement institution by assets, will start investing in environmental, social and governance (ESG) indices by early April and plans to add another 10 employees to its 100-strong workforce.

Speaking at the Asia Financial Forum (AFF) in Hong Kong this week, GPIF president Norihiro Takahashi said the fund had hired 30 executives during 2015 and 2016. He told AsianInvestor the fund was likely to appoint more front- and back-office staff this year, without elaborating further.

Even with the new appointments, GPIF’s investment management workforce will remain a very lean operation. Given that it had ¥135 trillion ($1.4 trillion) in AUM as of September, this is equivalent to $12.7 billion in assets per employee.

Core principles

Takahashi stressed that the pensions giant was placing ESG principles at the core of its investment plans. It set up an ESG division last year and will begin introducing stock indices that take such principles into account.  

He said 27 ESG benchmarks had been proposed to GPIF. “We are in the process of due diligence and hope to start investing into those indices before the famous cherry blossoms [bloom] in Tokyo [typically in late March or early April], and hope to disclose those indices in the summer.”

GPIF has been ramping up its commitment to ESG over the past two years. In September 2015 it signed the United Nation’s Principles for Responsible Investing (UN PRI), with chief investment officer Hiromichi Mizuno joining that organisation’s board in November.

Mizuno, a former private equity veteran, told UN PRI’s annual conference in September there was little point in making big investment returns if people could not step outside their homes in future because of pollution.

Governance efforts

Meanwhile, noted Takahashi, GPIF is becoming a more assertive asset owner. “We are engaging with companies and have started engaging asset managers over their [investing] activities,” he said. “Through such activities we feel we have been changing companies with dividend payouts and share buybacks, while more are publishing corporate governance reports.”

Takahashi (pictured left) is a relatively new arrival at GPIF, having joined as president in March last year from Norinchukin agricultural bank. Under Mizuno and Takahashi, the once ultra-conservative fund has sought to modernise its operations and improve its governance. This had led to it offering more information about its workings and actively promoting ESG concepts and signing Japan’s stewardship code.

Such efforts led AsianInvestor to recognise the pension fund in the governance category of our Institutional Excellence awards last year. 

GPIF is mandated by the Ministry of Healthy, Labour & Welfare to return at least 1.7% annually over nominal wage increases, and Takahashi said the fund had averaged a 2.4% return since its inception in 2001. “That is equivalent to a wealth gain of $360 billion,” he noted.

Alternatives activity

To ensure a sufficient level of return on its huge asset portfolio, GPIF has embarked on an enormous asset shift over the past five years, cutting its exposure to Japanese government bonds (JGBs) and investing more in foreign fixed income and equities and a small portion in alternative assets.

The need to conduct this asset switch was underlined by the Bank of Japan’s decision to introduce negative interest rates in January last year. The 10-year JGB was yielding just 5.6 basis points on Wednesday (January 18).

For instance, GPIF is seeking to diversify into infrastructure and private equity. While these diversification efforts are to be applauded, they can lead to difficulties.

The fund reported a $51.8 billion investment loss for the first quarter of its 2016/2017 fiscal year, largely on the back of drops in global equities following the UK’s June 23 vote to leave the EU. The illiquid nature of alternatives has led other institutional investors in Japan to be wary of following GPIF’s example. 

“GPIF is seen as being its own entity with its own needs, but until recently other Japanese pension funds were most concerned about remaining liquid to deal with cash flow,” a senior Japanese alternatives fund manager told AsianInvestor.

However, she noted that this was starting to change, citing the recognition by the country’s pension funds that they needed to raise their returns. “We are seeing signs of interest by pension funds in infrastructure, and then private debt, and we hope to see this move to private equity too.”