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Pension Funds

GPIF selects 3 ESG indexes for ¥1 trillion allocation

GPIF President Norihiro Takahashi
GPIF President Norihiro Takahashi

Japan's Government Pension Investment Fund shifted an initial 3% of its domestic equity allocations — or roughly ¥1 trillion ($9 billion) — to three newly minted indexes constructed around environmental, social and governance factors, the ¥144.8 trillion pension fund announced this week.

The outcome of an RFP process launched last August, GPIF said it had selected two broad ESG indexes — the FTSE Blossom Japan index and the MSCI Japan ESG Select Leaders index — as well as one thematic index, the MSCI Japan Empowering Women index.

A GPIF spokesman, in an email, declined to name the managers hired to oversee the ESG allocations. But he said the managers selected came from GPIF's existing pool of passive managers. The fund's most recent annual report listed BlackRock (BLK) and four local firms — DIAM Asset Management (now Asset Management One), Mizuho Trust & Banking Co., Sumitomo Mitsui Trust & Banking and Mitsubishi UFJ Trust and Banking — as passive domestic equity managers as of March 31, 2016.

The spokesman likewise declined to say how the ¥1 trillion in total ESG allocations was divided among the three indexes. However, Japanese language materials on GPIF's ESG investments calculated 39 basis points of combined outperformance over the five years through March 31, 2017, in relation to broader Japanese market indexes, based on allocations of 40% of the total each for the two broad indexes and 20% for the thematic, women's empowerment index.

The GPIF will announce its results for the fiscal year ended March 31, 2017 on Friday. However, details regarding which managers are overseeing what amount of ESG-related assets won't be revealed until the annual report for the current fiscal year is released.

GPIF President Norihiro Takahashi said in a news release the shift to passive ESG indexes would provide long-term benefits for the pension fund's beneficiaries, while helping revitalize Japan's corporate sector.

He said the GPIF is aiming "to expand ESG investment by adopting other indices," as well as making active ESG-focused investments.

The two broad ESG indexes launched by FTSE and MSCI in response to the GPIF's RFP both aim to mirror the sector weightings of their broad market-cap-weighted indexes for Japan, while favoring companies that rank highly on their respective ESG rating systems.

The other MSCI index favors companies that combine superior financial quality with high scores in terms of supporting women's participation and advancement in the workforce. MSCI's research for the index included backtesting data showing it would have generated an excess return, in relation to the MSCI Japan index, of 50 basis points a year between November 2009 and February 2017.

Seiichiro Uchi, Tokyo-based head of Japan index and ESG coverage with MSCI, said in an email his firm's research showed such outperformance resulting primarily from stock selection based on gender diversity scores, rather than capturing other factors, such as market-cap size.