GPIF aims to be trailblazer for ESG investment in Asia

Japan looks set to become the beachhead in Asia for environmental, social and governance-focused investment, and the country's huge Government Pension Investment Fund is ready and willing to lead the charge.

On Sept. 6 — almost a year after the ¥129.7 trillion ($1.25 trillion) fund joined the London-based Principles for Responsible Investment network — Hiromichi Mizuno, executive managing director and chief investment officer, told PRI members in Singapore for the organization's annual conference that the Tokyo-based GPIF hopes to become a “role model for Japanese investors,” and Asia more broadly, in integrating ESG factors into investment activities.

PRI signatories pledge to “adopt and implement” the principles agreed on by the organization's 20 initial asset owners brought together by then-United Nations Secretary General Kofi Annan in 2006. Those principles call on signatories to incorporate ESG concerns into their investment analysis and decision-making processes, as well as their engagement with investment managers and investee companies, with the caveat being that such efforts be consistent with their fiduciary duties.

In remarks to attendees as a candidate for one of two asset owner positions to be filled on PRI's 14-member board later this year, Mr. Mizuno conceded GPIF is relatively “new to responsible investment,” but he described himself as a true believer, recalling that the PRI's principles struck him as “quite obvious” from the start.

“We need to work hard as financial professionals and as investors to (ensure a) channeling of capital to companies that are seriously taking those ESG factors” into account in running their businesses, Mr. Mizuno said.

The chief investment officer pointed to the request for proposals GPIF issued on July 22 for “new ESG indices for our equity investment ... as a sign of our ambition” to create that flow of capital.

The GPIF wasn't the only asset owner at the conference moving in that direction. In comments following a Sept. 7 panel discussion on building relationships between ESG-focused asset owners and money managers, Christopher J. Ailman, chief investment officer of the West Sacramento-based California State Teachers' Retirement System, noted that his $193.4 billion pension fund's investment team is drawing up RFPs now for ESG-focused equity mandates.

Still, as the world's largest single pool of pension money, with ¥24.9 trillion — or about $240 billion — in allocations to passively managed Japanese equities as of March 31, GPIF has the potential to singlehandedly move the needle in terms of ESG-managed assets.

GPIF spokesman Shinichiro Mori said the fund's “ESG-focused index investment will be part of our passive domestic equity allocation,” but the scale of that investment can only be determined after reviewing the “investment capacity” of the proposed indexes, he said.

In a Sept. 7 interview, Martin Skancke, chairman of the PRI board, pointed to the GPIF's signing on to PRI on Sept. 25, 2015, as a notable milestone in the organization's “long game” to address its underrepresentation among Asian asset owners.

At the conference, PRI executives identified Asia, ex-Australia and New Zealand, and the U.S. as targets for greater efforts in signing up asset owners — looking to balance a lineup heavy with early adherents of ESG investing among European and Australian retirement funds.

At last count, PRI had 1,553 signatories, with 317 asset owners, 1,026 investment managers and 210 service providers, who hold sway over roughly 50% of global institutional capital, said Joy Frascinella, a London-based spokeswoman for the organization.

While all segments have ESG-related roles to play, including stock exchanges as setters of disclosure requirements, PRI executives noted that asset owners are at the heart of the program.

Asset owners “are the ones who are going to drive responsible investing forward (and) we don't have enough” of them, said Fiona Reynolds, PRI's managing director, on the opening day of the organization's three-day conference in Singapore.

As of Sept. 12, asset owners in Asia ex-Australia and New Zealand accounted for a mere 13 of PRI's asset owner signatories, or 4.1% of the total. Of that total, 11 are based in Japan, with one apiece from South Korea and Indonesia.

PRI is gearing up now to address that sparse representation, even as executives noted challenges in Asia, including the need to engage more with family-dominated managements and the perception — in a region where local asset owners maintain heavy equity allocations to domestic companies, many of them publicly owned or influenced — that responsible investing effectively politicizes investments.

“We recognize that we need to be present locally to ... promote responsible investing,” agreed Mr. Skancke in the interview, noting that PRI, in October 2015, added an office in Hong Kong with a head of Asia ex-Japan and one project manager “to better serve signatories and potential signatories in this part of the world.” Meanwhile, “we have a local network manager in Tokyo and we're also adding a network manager in Australia to cover Australia and New Zealand,” he said.

Other signs offering hope of greater Asian interest in ESG-focused investing are the efforts being made in several other countries in the region — including South Korea and Thailand — to develop stewardship codes, he said.

“There's no other region in the world developing as many stewardship codes as they are in Asia,” said Kerrie Waring, executive director of the London-based International Corporate Governance Network, during a panel discussion on the second day of the conference focused on “the responsible investment landscape in Asia.”

But with so many eyes on GPIF, Mr. Skancke cited the addition of that “major, major fund” to PRI's signatory list as a particularly positive development, promising further progress to come in the region. “I think that hopefully (this) will create a ripple effect in the Japanese market,” providing some momentum, said Mr. Skancke, a Norwegian who played a central role in launching the Norwegian Government Pension Fund Global, Norway's $878.3 billion, Oslo-based sovereign wealth fund.

Some momentum is already apparent, with four more Japanese pension funds becoming signatories since the GPIF joined, including, most recently, Japan's ¥12.7 trillion Pension Fund Association, Tokyo, on May 13.

PRI officials at the conference said other big fish appear poised to join as well, with two — who declined to be named — predicting Japan's ¥20.6 trillion Pension Fund Association for Local Government Officials, or Chikyoren, will sign on before the end of the year.

A Chikyoren official declined to comment.

Mr. Skancke predicted broader progress to come in the region.

Although PRI has yet to sign up its first asset owner in China, Mr. Skancke said he sees “enormous potential” for the responsible investment movement there, driven by broad-based concerns about environmental and climate-related matters, and an understanding among the country's political leaders and regulators that the investment community needs to be part of the solution. “China is a huge opportunity for us,” he said.

Likewise, PRI has yet to sign up its first asset owner in India, but the economies of both India and China face — just to mention one issue — an enormous transition in terms of their energy use, with huge implications for institutional investors globally, said Mr. Skancke. “For investors to understand both the risks and opportunities in that transition is really important, and PRI can help build that knowledge platform,” he said. n