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GPIF sees geopolitical tensions as ESG incentives

The world’s largest pension fund is wielding its bargaining powers to drive environmental, social and governance (ESG) development across Asia.
GPIF sees geopolitical tensions as ESG incentives

Geopolitical tensions and rising energy prices only provide more incentives for Asian policymakers and investors to adopt ESG strategies, according to Japan’s $1.6-trillion Government Pension Investment Fund (GPIF).

GPIF will also be wielding its strong bargaining power as the world’s largest pension fund to drive ESG adoption across Asia.

“No one can deny the importance of climate change in the mid-to-long term. The rise in energy prices will give more incentive for Asian countries to think more seriously about energy policies and the development of new energy,” said GPIF’s governor Naoko Nemoto. 

Naoko Nemoto,
GPIF

The crisis between Russia and Ukraine, along with US-China tensions, have been driving up energy prices globally. However, Nemoto told a Financial Times webinar on Tuesday that she believes global trends and coordination around ESG will not be much affected.

One of GPIF’s mid-term objectives is to increase alternative investments, which stood at 0.92%, or $15 billion, of the $1.6 trillion portfolio as of the end of 2021. The maximum portion of alternative assets is capped at 5%.

“We are quite keen to explore more investments in Asian markets. When we expand investments in Asia, ESG factors are quite important,” Nemoto said.  

She pointed out that as global markets face challenges such as rising interest rates and inflation, ESG is an important factor to ensure resilience, as she found out during the pandemic that companies with good ESG scores have more stable stock performance and can attract more long-term investors.

“It [has been] conceived by many other Japanese investors [besides GPIF] that ESG strategy and disclosure would be important for Asian corporates, to attract more finance,” she said.

GPIF's portfolio as of the end of 2021. (Source: GPIF)

TRACKING PROGRESS

The Japanese pension fund is also increasing investment in ESG indices each year. Most recently, GPIF adopted an ESG index, the FTSE Blossom Japan Sector Relative Index, for Japanese equities investments. It will passively invest $6.2 billion to track the index. There are now eight ESG indices for both Japanese and foreign equities adopted by GPIF, it said in an announcement on Wednesday.

“GPIF will aim to ensure long-term profits from the sustainable growth of portfolio companies and the market as a whole through its ESG investment and stewardship activities, continuing to improve the indices we have already adopted, and adopt new indices,” GPIF President Masataka Miyazono said in the announcement.

The selection of the index is primarily based on FTSE Russell’s ESG ratings. Evaluation of companies’ management attitude toward risks and opportunities of climate change is also considered, GPIF said.

GPIF’s expansion in ESG indices has provided incentives for companies to improve ESG performance in order to be included in those indices and attract funding from GPIF, Nemoto said.

This also applies to asset management companies. “We choose asset management companies based on the integration of ESG and their know-how in data analysis. And for asset management companies, it's quite critical to be selected by the GPIF,” Nemoto said.

FULL DISCLOSURE

In March, GPIF disclosed lists of companies nominated by its asset managers for doing well in ESG integration and disclosure.

It requested external asset managers of Japanese equities to each nominate up to 10 companies for creating excellent and most-improved integrated reports in 2021, as well as explaining why they chose these companies and what they expected in terms of improvements..

For foreign equity investments, GPIF also asked its external managers to nominate up to five companies for “excellent Task Force on Climate-Related Financial Disclosures (TCFD)” and up to three companies each for “excellent disclosure of governance, strategy, risk management, and metrics and targets”.

Companies selected by GPIF’s external asset managers for excellent TCFD disclosure
(Source: Disclosed by GPIF on March 23, 2022)

These requests have translated into lists of nearly 100 companies that were doing well in the categories. They were disclosed by GPIF in March with detailed remarks on why these companies were nominated and evaluated.

“GPIF has a very strong stewardship focus, and has been quite vocal and hard on external managers. Since 2018, they have been paying management fees only to those asset managers that outperform the benchmark. In addition, they recently revised their operating policy, which is now very specific around what they expect for asset managers and ESG,” said Diego López, managing director of Global SWF.

“We have not seen anything that detailed and strict in the industry, and it will definitely make an impact on how other sovereign investors may start looking at this topic. We believe the alignment of asset owners and asset managers will be a key theme in the next few years, and GPIF could be setting an important trend around ESG,” López said. 

¬ Haymarket Media Limited. All rights reserved.
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