IEEFA Asia: Japan’s $1.3 Trillion Pension Fund Approaches a Climate-Risk Crossroads

An Imminent Decision on How a New Mandate at GPIF Will Be Managed

When the world’s largest pension fund issued a call last summer for guidance on how best to increase its holdings in socially-responsible companies, it was news—and rightly so.

The Government Pension Investment Fund (GPIF) of Japan, which manages US$1.3 trillion in assets, wields major market influence both at home and abroad. In announcing the program to create an index built around Japanese companies that meet certain environmental, social and governance (ESG) criteria, the fund was sending corporate Japan a none-too-subtle message.

“It will be an honor for Japanese equities to be included on the ESG index,” said Hiroshi Komori, who heads GPIF’s new stewardship and ESG division. “This will encourage companies to strive to be included.”

GPIF did not disclose the size of the mandate, but even a small percentage of its enormous holdings would loom large. As of the end of 2016, almost a quarter (23.76 percent) of the fund was invested in domestic equities, the target of this mandate.

In its search for profitable Japanese companies that are also good corporate citizens, the fund says it will be assertive. It will expect outside managers to know, for instance, how environmentally conscious (or environmentally unconscious) a company is and to factor that into their investment decisions.

The index will very likely be made up of companies that are doing a better job of managing ESG risks than their peers. For this alone, GPIF deserves applause.

ACTIONS SPEAK LOUDER THAN WORDS, HOWEVER, and GPIF has yet to say which fund managers it will pick to make the decisions around how to implement its new mandate.

That said, the fund is seeking managers who can “maximize long-term investment returns from their portfolios by minimizing negative externalities such as environmental and social issues,” according to Chief Investment Officer Hiromichi Mizuno.

ESG analysts, as a group, are all over the map on how best to invest responsibly. And while issues like gender equality and corporate transparency are crucial, climate change is perhaps the most material of all risks.

GPIF would do well to heed a study published last year by Mercer, a specialist consultant on fund management, on how the coal industry stands to be among the biggest losers in the global transition to a new energy economy and how renewable energy industries will gain.

The fund would be best serving its members by selecting a manager whose ESG methodology screens, especially, for exposure to coal-mining and coal-power generation.

Norway’s US$850 billion sovereign wealth fund has blazed this trail already, having divested recently from companies that derive more than 30 percent of revenues from coal-related activities. The Financial Times reported last week that the Norwegian fund “gained .78 percent in returns in the decade to the end of 2016 due to its decision to exclude companies that cause severe environmental damage, such as coal miners.”

GPIF has received applications from 14 asset managers for the mandate in Japan, and the winners will be announced imminently. Just waving a broad ESG banner is no longer enough. The time to be explicit on climate risk is now.

Yulanda Chung is an IEEFA energy finance consultant.

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