Japan's biggest institutional investors appear increasingly willing to filter their investments with a mesh of environmental, social and governance (ESG) thinking because they can already see the long-term benefits.

And there's scope to take it further, according to Japan Post Bank's Tatsuo Ichikawa, by exploiting inconsistencies across the global corporate landscape and looking for underappreciated ESG investment opportunities.


Tatsuo Ichikawa 

“There are many types of companies providing ESG scores and they are all different, so the same investment object might achieve both high and low scores,” said Ichikawa, who heads Japan Post Bank's quants team. 

“When there is consensus, there is no room for alpha,” he said at AsianInvestor’s 8th Institutional Investment Forum Japan, while emphasing that he was talking in general terms rather than about Japan Post Bank's own strategy. “So with no consensus on ESG scores, it means that investors can find some return opportunities, provided you can analyse the market correctly.”

The general feeling is that the longer the time horizon, the greater the potential ESG benefits, which is why Government Pension Investment Fund (GPIF) has been leading the way and other major asset owners like Japan Post Bank are now treading a similar path.

“GPIF is a universal and ultra-long-term owner, so that is why they are focusing on ESG,” said Katsuyuki Tokushima, head of pension research at NLI Research Institute and an advisor as well as board member for a number of Japanese pension funds.

“ESG factors are a source of alpha that is not included in financial reports as for now," he added at the same forum. “My perspective is that ESG is not a short-term source of alpha but a potential medium-to-long-term profit source.” 
 

Katsuyuki Tokushima
Where regulatory standards are relatively weak or the corporate culture is laxer, such as in some emerging markets, the ESG benefits could be particularly strong, said Japan Post Bank's Ichikawa.
 
“Especially for governance in the emerging or other high yield markets, the companies that might cause problems in the future can be excluded early on by looking at the G score [from companies providing ESG scores],” he said.
 
Ichikawa added that academic papers had yet to find any clear evidence that ESG factors could enhance short-term returns but over the long-term they should not only promote social sustainability but also mitigate against the chances of a systemic lower-return environment.

JUST THE BIG BOYS AND GIRLS

For all that, only the biggest corporate pension funds in Japan have the necessary overseas outreach to make the most of the ESG benefits listed by Ichikawa and Tokushima.

Relatively smaller corporate pension funds are also challenged by Japan's ageing demographics, which in some cases has led to bigger payouts than new contributions from working members.

Thus, the incentive to invest for the “ultra-long-term” – like GPIF – is much smaller.

But some relatively larger players are warming to the potential ESG benefits, such as the Japan Telecommunications Welfare Association (JTWA), which has assets under management of about $50 billion, Kazuhisa Igasaki, a director at JTWA, told AsianInvestor.

JTWA has also recently moved into the alternatives space and taken more illiquid exposure onto its portfolio.

Igasaki said that the pension fund has recently started to look more closely at the use of ESG factors.

“We want to learn how we can integrate ESG in our investment decisions and investment strategy,” Igasaki said. “We do not want to make [radical] ESG changes [to] our investment approach ... so we will instead integrate it gradually.”

JTWA is a voluntary, additional corporate pension fund on top of the mandatory corporate pension scheme. According to Igasaki, that means the fund needs to make itself more attractive, especially for younger and new members.

“That does not only go for performance, but also in terms of ESG. So on top of the fact that we believe in ESG as a part of our future investment strategy. We also see an ESG profile as an appeal for stakeholders and potential new members,” Igasaki said.

JTWA is targeting an annual return of 2% to 3%.