The world’s largest pension fund has selected three environmental, social and governance (ESG) indices that it will track for around ¥1trn (€7.8bn) of Japanese equity investments, and has called on overseas investors to follow suit.

The ¥145trn Government Pension Investment Fund (GPIF) today announced that it had selected three benchmarks, especially created for the fund by MSCI and FTSE Russell. The FTSE Blossom Japan index and the MSCI Japan ESG Select Leaders index are two broad ESG indices, and the MSCI Japan Empowering Women index is a benchmark with a social “theme”.

It has already started investing based on these indices and said the initial allocation accounted for 3% of its Japanese equity portfolio, equating to roughly ¥1trn.

GPIF president Norihiro Takahasi said the pension fund expected the indices would incentivise Japanese companies to improve their “ESG evaluations and enhance enterprise values in the long term”.

“If overseas investors focusing [on] ESG with long-term horizon follow, the investment returns of Japanese equities are likely to improve,” he said. “GPIF, as a universal owner – a large scale investor holding well diversified portfolio – and its pension beneficiaries are considered to reap most benefit by the optimisation of [the] investment value chain.”

The GPIF said it aimed to expand its ESG investment by adopting other indices or active investment strategies. It said an index with an environmental theme was still being examined.

The Empowering Women index comprises companies whose gender diversity initiatives MSCI considers encourage more women to enter or return to the workforce. The Japanese government has set explicit goals to encourage women’s participation and promotion in the business world, with research suggesting this may benefit the Japanese economy.

The MSCI ESG Select Leaders index targets Japanese companies with the “best ESG profile” relative to their sector peers. The FTSE Blossom Japan index includes companies meeting standards for ESG practices based on the FTSE4Good index’s inclusion rules. 

The GPIF put out a tender for Japanese equity ESG indices last year. It today said that in choosing the indices, it emphasised that they apply “positive screening” that selects companies for inclusion based on an evaluation of their ESG behaviour. In addition, the evaluations should be based on public information and the methods and results should be disclosed. ESG “evaluators” and index providers should be properly governed and their conflicts of interest properly managed, the fund said.

At a Responsible Investor conference early last month, Hiromichi Mizuno, CIO of the GPIF, spoke about the importance of index providers’ governance and the need for more clarity about company ESG evaluations.