Japan's Government Pension Investment Fund (GPIF) has seen a lot of change since Hiromichi Mizuno took over as its chief investment officer, in January 2015. Once a sleepy, passive fund giant, these days the ¥161.8 trillion ($1.49 trillion) fund advocates for environmental, social and corporate governance (ESG) matters and only pays its active managers according to a performance-based model.
That’s led to a widely held impression that Mizuno is an activist CIO. Is that correct?
Speaking to AsianInvestor at GPIF’s headquarters at Toranomon Hills Mori Tower in Tokyo, the CIO paused for a moment to choose his words.
“Some people call me an environmental activist; others call me an ESG activist,” he replied. “In today’s world people question about capitalism, about the capital market. The general face of our business has been really damaged.
“On one hand we promote more shareholder activism, but at the same time the number of public companies continues to drop because the corporate executives are tired of the shareholders’ activism and the short-termism in the capital market. So we just decided to be a catalyst and try to change the system.”
Indeed, Mizuno confessed that while he carries out the conventional tasks of a CIO, “that is not really what excites me.” Instead he tries to take a more thoughtful approach to the job.
“If there is any benefit of the world having me to end up as the CIO of the biggest pension fund it’s that I actually think that I am sometimes too philosophical to be a CIO,” he laughed.
“To be honest, I am almost only interested in changing the system, or moving the system, because there are much smarter people than me who are much more technical about things. Both my team and asset managers are full of smart people that can do what they are required to do, so I have been more focused on how to affect the system and to create an environment where people work more aligned with each other.”
Asked to point out the most challenging task during his tenure as CIO, Mizuno points to GPIF’s rising role as a proponent of ESG integration.
To be honest, I am almost only interested in changing the system, or moving the system
He also thinks of it as his most successful task.
Mizuno argued that the ESG focus has helped carve out two fundamental goals for GPIF as an asset owner: being universal and cross-generational. Its need to invest for the benefit of future generations clearly dovetails with pushing an ESG agenda.
“ESG was a huge struggle at first. Even after we started, we attracted criticism everywhere, but we continued to do it,” Mizuno recalled.
The pension fund has introduced ESG indices and started asking asset managers to be responsible for the ESG integration and analysis in their portfolio companies.
“Our efforts have now put us in the leaders’ board in the global landscape. These days we are being asked by our peers – even the most advanced ones – on ESG and sustainability agendas,” he said.
“We have been quite provocative in the way that we have said that this industry really needs to change to survive. We challenged the way how assets owners and active managers operate, and we also changed the role of the other service providers, such as index providers.”
Mizuno’s philosophical perspective resurfaced when explaining the purpose of GPIF’s increasing assertiveness in ESG and climate change.
“It of course depends on the definition of activism, but we are just trying to be the asset owner to make sure that what we ask the portfolio company is also being done by the asset managers and other owners like ourselves. There is so much inconsistence.”
In 2018 GPIF hired human resource consultant Mercer to interview the executives of all its asset manager partners. The purpose was to identify whether any had short-term incentives that would derail their alignment to GPIF’s needs, for instance how their ESG analysts are incentivised.
“The way I saw it is that it is what the portfolio managers analyse about their portfolio companies, so we should ask the same from our asset managers and make them define how ESG efforts are incentivised internally,” Mizuno explained.
Surprisingly, the strict rules around how GPIF invests – it’s required to outsource the management of all equities and volunteers to outsource all foreign fixed income – has benefited this ESG process.
Mizuno and his team came to realise that because it has to use external managers it is the asset management industry’s biggest institutional client. That gives it power.
“We have no way out, so when we see a problem we should sit down and try to solve it. Because we have no choice to give up,” he said.
“A lot of the big asset owners take investment inhouse as way to solve or address agency issues ... But we have to live with the agent, so we have motivation – and of course some weight.”
That wasn’t always Mizuno’s view. He admitted that when he first joined he wanted GPIF to be able to manage its portfolio inhouse.
“The [pension funds of the] Canadians are the extreme, taking everything inhouse and everything into private. GPIF is almost entirely in public markets and equity management is 100% outsourced.
“At that time, people thought that sophisticated investors should try to copy the Canadian model, so we should invest more in private markets and more direct. But when I joined, we had 80 people, and they have 1,000.”
Now Mizuno sees he can use GPIF’s heft as an advantage.
“We are just trying to be persistent on being the one to make the capital market more sustainable and consistent,” he said. “That has been our focus, and our unusual regulatory restrictions for an asset owner of this size – not being able to take any investments inhouse – has probably given us interesting leverage.”
This article is an excerpt from a longer interview with Hiromichi Mizuno, which features in the Winter 2019 edition of AsianInvestor.