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Investor Profile: Japan Government Pension Investment Fund

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GPIF’s 100-year perspective places ESG at the heart of its world view 

Key data

• President: Norihiro Takahashi
• Location: Tokyo
• Established: 2006
• Assets: ¥156.4trn (€1.2trn)

With a time horizon of 100 years, Japan’s Government Pension Investment Fund (GPIF) is charged with ensuring that the country’s retirement nest egg lasts for that long. This is why sustainability has become its key yardstick.

GPIF is the world’s largest pension fund. It manages the pension reserves of Japan’s Employees Pension and the National Pension – two of the main pension public pensions.

It has ¥156.4trn (€1.2trn) under management, and its constituents are the world’s fastest ageing population. Its role is to preserve and to grow its capital pool through stable, long-term returns.

“Japan is experiencing very rapid ageing. We have fewer children and more aged people,” says Naori Honda, a GPIF spokeswoman.

Under the Japanese ‘pay-as-you-go’ system, the government pays pensions from the contributions of residents. GPIF contributes about 10% of Japan’s annual pension budget. 

The fund was established in 2006 to supplement Japan’s pension payments for the next century – hence the importance of implementing ESG principles, which are a dominant theme in the investment philosophy.

As a universal owner, GPIF is aggressive in implementing its stewardship responsibility over a portfolio of Japanese equities, which made up 25.1% of its holdings as of end-March 2018. GPIF is extending its stewardship activities to overseas equities, which account for 23.9% of total investment.

Perhaps even more significantly, GPIF is set to apply these stewardship responsibilities to fixed income and alternative assets. GPIF’s principles, Honda says, incorporate the concept of intergenerational dependency. 

GPIF is to achieve its investment goals with minimal risk solely for the benefit of pension recipients from a long-term perspective, “thereby contributing to the stability of the system”.

“The sustainability of the whole capital market is very important to enable us to achieve longer-term results to decrease the burden of future generations,” she says. 

“Our ESG investments are consistent with that overarching goal. We see ESG as very important because we have to finance our pension scheme over the next 100 years.”

GPIF is seen by the likes of Willis Towers Watson as a leader in asset owner stewardship. It has played a role in enforcing a stewardship code, introduced in 2014, through its external asset managers.

Asked if ESG principles apply only to GPIF-invested equities, Honda responds: “First of all, let me emphasise that we consider ESG in every asset class. In the past, we confined our stewardship responsibility only to equities. But we’ve now started our ESG scoreboard for all assets, including alternatives and fixed income.”

Fixed income joins the mainstream

GPIF and the World Bank Group jointly undertook a study this year on how the principles of ESG can be applied to investing in bonds. Findings were released in April. They say the evidence suggests that incorporating ESG into fixed income should be part of overall credit risk analysis, and contribute to more stable financial returns. The study also dispels the myth that incorporating ESG means having to sacrifice financial returns.

“ESG investing is increasingly becoming part of the mainstream investment process for fixed income investors, as opposed to a specialist, segregated activity, often confined to green bonds,” said the study. 

Honda explains that GPIF’s guidelines on investment principles were revised last October. These stipulate that GPIF take ESG into consideration in order to promote stewardship activities. 

GPIF is still not permitted to invest directly in domestic equities with legislative changes.

Honda describes GPIF’s position as “unique”. “With the exception of a small portion of our portfolio, all our investments are through external asset managers. We are unique in this sense,” she says. “Many big funds – for example, CalPERS, CalSTRS and Norges Bank Investment Management – have in-house investment teams.” 

GPIF does not have an in-house investment team as such. But its staff keeps a watching brief on its external asset managers. The fund functions with 120 staff operating out of a nondescript office block in Kasumigaseki, an enclave of government offices in central Tokyo. 

The government is concerned that, given its size, if GPIF did invest directly in Japan’s stock market, it could have an undue influence on corporate Japan. GPIF owns shares in more than 5,000 companies, of which 2,300 are Japanese.

“Almost 90% of our equities holdings are passive investments, meaning we are long-term owners of these companies,” says Honda. “We will abandon these companies only when they have been excluded by the indices we adopt. 

“We ask our external managers to take ESG into consideration in building their portfolio, especially for equities. So you could say that, in that sense, all our equities investment is ESG-related”

Naori Honda

“Japanese law restricts GPIF from imposing the materiality of ESG issues on Japanese corporates and our external asset managers. For example, we cannot say that GPIF thinks carbon emission is the most important factor and therefore we should not invest in these companies.”

GPIF’s charter prohibits it from investing in equities directly, and its external asset managers make the selections, deciding which ESG matters to prioritise. So GPIF must rely on asset managers to carry out its brief.

“We ask our external managers to take ESG into consideration in building their portfolio, especially for equities. So you could say that, in that sense, all our equities investment is ESG-related.”

GPIF invests through the likes of Prudential, State Street Global Advisors, JP Morgan Asset Management, Eastspring, Capital Group, Russell, BNP Paribas Asset Management, Goldman Sachs Asset Management, BlackRock and Fidelity.

Honda says GPIF conducts regular reviews of its asset managers to ensure that they are committed to ESG – and that they integrate ESG into their investments.

In addition, at end of March 2017, GPIF has ¥1.5trn invested into three ESG-specific indices. These are the FTSE Blossom Japan index, MSCI ESG index and MSCI Japan Empowering Women index.

“The components of these indices have been selected based on the publicly-disclosed ESG information of Japanese corporates,” Honda says. “By investing in them, GPIF wants Japanese companies to pay attention to ESG. We are expecting that the use of these ESG indices will provide an incentive for Japanese companies to enhance responses to ESG issues to lead to the enhancement of their corporate value in the long term.”

Given its heritage and goals, GPIF will continue to strive to promote stewardship activities – and through them to create a more sustainable global capital market.

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