The world's largest pension fund had charted a course for sustainable investing, but the Government Pension Investment Fund, Tokyo, is now treading water.
After taking the helm of the world's biggest pension fund as CIO in 2015, Hiromichi Mizuno sought to turn GPIF into a fund that — as one Harvard Business Review article put it — tried to "change the world" through its approach to environmental, social and governance investing.
However, the $1.63 trillion fund — constrained by stricter legal restraints than its peers — has largely been quiet on impact investing since Mr. Mizuno was succeeded in April 2020 by Eiji Ueda. At the same time, the COVID-19 pandemic has accelerated the global push toward ESG themes and GPIF's peers around the world have cut fossil-fuel investments and threatened to pull funds from firms that fail to meet ethical standards.
"The GPIF doesn't have a mandate to pursue ESG investing in the face of lower returns," said Takatoshi Ito, a professor at Columbia University's School of International and Public Affairs, who headed a government panel to reform the fund. "It's difficult to balance with the fund's fiduciary duty."
The GPIF's overriding principle is legally mandated gains — the fund is required above all else to pursue a real investment return of 1.7%. Some rules also prevent the GPIF from taking a more hands-on approach to governance: it can't legally hold direct stakes in companies, or vote at shareholder meetings, and it outsources investments to money managers.
"Under current legislation, we can't sacrifice returns for the sake of buying environmental names or ESG names," Kenji Shiomura, senior director of the fund's investment strategy department, who oversees selection of ESG indexes, said in an interview.
Japan-focused ESG funds returned 5.2% on average this year, according to data compiled by Bloomberg, underperforming the 8.6% return of the benchmark Topix index.
Mr. Mizuno once called fiduciary duty the "monster in the room," arguing that failing to integrate ESG factors ran contrary to the duty for clients with long-term investing horizons. The fund's investing principles say it promotes incorporating ESG factors into the investment process but only in addition to financial factors.
At the same time, GPIF is coming up against other hurdles that prevent it from keeping pace with other pension funds — from the lack of a unified scoring method for sustainable investing to legal restraints that handcuff its ability to change companies' behavior.
"I acknowledge that we need to produce results by dealing with ESG investment over the long term," said Hirohide Yamaguchi, the newly appointed chairman of the GPIF board of governors, which oversees the fund.
The GPIF had about ¥5.7 trillion ($52 billion) invested in five ESG equity indexes as of March 2020, the most recent date for which information is available. Last December, it added two more for overseas equities, with ¥1.3 trillion invested against them, and has formed a number of partnerships globally to promote green bonds. But that's still less than 5% of its assets, and how the funds are allocated is opaque.
"To say we'll invest ¥10 or ¥20 trillion in ESG is not the most appropriate for our goals. We're not driven by a numerical target," GPIF's Mr. Shiomura said. "When you consider those factors, we can't give a set amount or percentage of ESG investing we will do."
Masaaki Kanno, chief economist at Sony Financial Holdings and another former member of the expert panel to reform the fund, said there needs to be more disclosure.
"It's laudable that the pension fund promoted ESG so early on," he said. "But it needs to do a better job of explaining the relationship between returns and ESG to the wider public."