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Japan's GPIF turns global in hunt for environmental equity index

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The world’s biggest pension fund wants to track its investments against an innovative global equities index that selects companies contributing to solving environmental issues.

In a tender notice, Japan’s ¥157trn (€1.2trn) Government Pension Investment Fund (GPIF) said the index should select equities based solely on environmental, social and governance (ESG) factors, focusing on the environment.

The fund is looking to make a positive impact on the environment, and said the index should be based on “the concept that encourages to seek the solution of environmental issues, rather than uniformly excluding companies in specific industries or types of business (so-called negative screening)”.

Citing the cross-border nature of environmental challenges, the fund said it had put on hold the selection of an environmental index for domestic equities to prioritise the search for one for global stocks.

Earlier this year GPIF selected three ESG domestic equity indices, two broad ones and one geared towards empowering women. At the time it said an index with an environmental theme was being examined.

GPIF president Norihiro Takahashi said: “As a universal owner and long-term investor, GPIF understands that environmental issues such as climate change are an important ESG factor.”

Most existing environmental stock indices, however, sought to decarbonise portfolios by excluding certain industries, he said.

“Consequently, few indices aim to build a green economy, evaluating companies across the board that contribute to sustainable environment,” Takahashi continued. “Therefore, we have decided to request proposals for global environmental stock indices.”

GPIF requested innovative ideas from applicants based on their “abundant” expertise in evaluation and index construction methodology.

For example, it expressed an interest in indices that “may help lift overall stock markets both in Japan and worldwide”.

GPIF asked vendors to propose two indices based on the same concept: one for international equities excluding Japan and one for Japanese equities. They should ideally also submit an index of global equities including Japan “for the purpose of comparative analysis”.

The proposed indices should provide the same levels of return as their capitalisation-weighted parent index and improve risk-adjusted returns in the long run.

This should be proven through past performance and a back test, according to the GPIF.

The vendors should “disclose data necessary for passive investment” and the indices should have “a capacity for considerable investment”.

As part of the selection process GPIF will carry out “field research” to assess long-listed applicants’ governance system. The pension fund’s CIO has previously argued that investors should pay more attention to index vendors’ operations and governance given the influence they can wield. 

GPIF has appointed transition managers for its domestic and foreign equity portfolios, it announced today. Russell Investments Japan was selected for domestic equities, and BlackRock Japan for foreign equities.

GPIF recently announced performance results for the second quarter of its 2017 fiscal year. Its portfolio gained ¥4.45trn, roughly 3%. On annualised basis from fiscal year 2001it has gained 3.2%.  

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