The development of a social bond market is extremely important, although of all environmental, social and governance (ESG) issues risk associated with climate change poses the greatest challenge to investors, according to Masataka Miyazono, president of Japan’s Government Pension Investment Fund (GPIF).
“Risk occurs simultaneously in all asset classes, though the magnitude of the impact may vary,” Miyazono told a green and social bonds conference, jointly organised by the International Capital Markets Association (ICMA) and the Japan Securities Dealers Association, in Tokyo today.
He said: “No matter how much diversification you do, you cannot completely eliminate the risks. These risks are considered highly likely to materialise over the long term.”
GPIF, in its first published analysis of the impact of climate change on its portfolio, found that if the world could limit global warming from greenhouse gas emissions to 2°C, the value, particularly of Japanese companies, would increase.
Miyazono said that working towards this target was generally considered costly for companies.
But he suggested that the advantages of achieving the target would lead to new opportunities in areas such as environmental technologies. The value created from utilisation of these technologies would exceed the cost of reducing greenhouse gas emissions.
This trend was particularly evident in domestic (Japanese) equities, he said. “Based on our analysis, there are many opportunities for Japanese companies to generate business profits.”
Miyazono added: “We intend to further deepen our analysis and knowledge related to climate change on bonds.”
He told the audience that, from 2017, GPIF had expanded the scope of its ESG investment from equities to all assets, including bonds. Since last year, it had expanded its bond investments to green, social and sustainability bonds.
Specifically, he said, GPIF had forged partnerships with multilateral banks and governmental institutions around the world, building up platforms to encourage the creation of sustainability bonds.
“As at the end of June 2020, we have partnerships with 10 multilateral banks and government financial institutions,” he said. “Our investment in green, social and sustainability bonds grew to JPY441bn (€3.7bn) as at the end of March 2020.
Miyazono said that, from a risk control perspective, the impact of environmental and social issues and governance on the capital market was negative over the long term.
“We do think it is extremely important to avoid the risk of asset impairment and to pursue sustainable investment returns,” he said.
Development of a social bond market was extremely important, he said, for the sustainability of capital markets and, in turn, the long-term returns of investments by pension reserves.
The conference audience was told there had been an exponential increase in the issuance of social bonds since the COVID-19 to mitigate the social impact of the pandemic. The amount of social bonds rose to $100bn this year, from just $17bn last year.