Why GPIF poured $10bn into two new ESG indexes

An official for the Japanese state pension fund explains why it chose two S&P Dow Jones equity indexes, and discusses its interest in ESG-related bond benchmarks too.
Why GPIF poured $10bn into two new ESG indexes

The decision by Japan’s giant Government Pension Investment Fund (GPIF) to invest $10 billion to track two new stock indexes focusing on carbon efficiency marks the latest step in its effort to embrace environmental, social and governance (ESG) principles.

On Tuesday (September 25), the ¥158.58 trillion ($1.4 trillion) pension scheme announced that it had chosen S&P Global Ex-Japan LargeMidCap Carbon Efficient Index and the S&P/JPX Carbon Efficient index, two new indexes launched at the same time as GPIF's announcement. The decision follows a 10-month search.

“We implemented an RFP for a global environmental stock index last November and received 17 indices from candidates,” a spokeswoman for GPIF told AsianInvestor in written answers to questions about the stock indexes. “We regard these two indices we selected as going along with GPIF’s idea to improve the sustainability of the overall market.”

Market sustainability is a core strategic goal for GPIF. As Hiromichi Mizuno, chief investment officer (CIO) for the fund has explained to AsianInvestor, GPIF’s asset base is so large the biggest risk to its operations is structural instability to the capital markets at large. Environmental uncertainties or rapid climate change is one way this could happen.

Hiromichi Mizuno, GPIF

The new indexes are passively run, a strategy the pension has increasingly focused on, since active fund managers failed to provide GPIF with any alpha for the 10 years to the end of 2016, while charging relatively high fees when compared to passive funds.

The spokeswoman said GPIF would assign asset managers to oversee the investments, as it is prohibited from making investments itself. However she declined to say which firms it would choose, noting only that it would not disclose any names until the fund's annual report for the current fiscal year is published. That should happen in July 2019.

Meamwhile, GPIF is willing to cooperate with asset owners in Japan and elsewhere that are interested in adopting the methodology of these two indexes.

“We might introduce these indices to other public pension funds, but it is up to them whether or not to decide to invest in these indices,” said the spokeswoman.

Vinit Srivastava, head of strategy and ESG indices at S&P Dow Jones Indices (SPDJI), said: "The index design is unique and would be attractive to any asset owner who is looking to incentivise change in behaviour in a clear, transparent manner ... in a low-carbon strategy,"


This is not the first time GPIF has used ESG-themed indexes to invest into equities. In July 2017, the pension fund said it would invest ¥1 trillion via three ESG-affiliated funds, two from index provider MSCI and one from FTSE Russell.

It opted to add new indexes this time instead of adding to these benchmark investments to better diversify itself.

“We decided to use these new index products in order to expand our scope of ESG investing to [ensure it is] 'E' focused," noted the spokeswoman.

She added that GPIF opted for these newly launched indexes because they focus on companies that have a low-carbon approach. By contrast, most existing environmental indexes, as the pension fund has noted, tend to take an exclusionary approach to investing by leaving out carbon-heavy industries en masse

"As a universal owner, we prefer indices with positive screening or 'tilt' evaluation within each industry," the spokeswoman noted.

SPDJI's Srivastava told AsianInvestor the indexes are designed to penalise the non-disclosure of carbon data by companies and clearly sets out how they are weighted according to the status of their emissions. 

The GPIF spokeswoman declined to say whether the fund would add new ESG-themed stock indexes in the future, noting “we do not have such a plan at present”. But she did not rule out the possibility.

Moreover, GPIF is keen to see further development in the relatively nascent area of ESG-based investment in fixed income, said the spokeswoman. 

In 2017 the fund conducted joint research with the World Bank Group on ESG considerations in bond investments. However, the spokeswoman admitted that the fund isn’t ready to make allocations on this basis yet.

Before it does so, GPIF needs to further examine how to evaluate the stewardship activities of fixed income managers, she added.

Story updated to reflect the gender of GPIF's spokeswoman and the final release date of the pension fund's annual report in 2019.

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