Why GPIF and NZ Super excel in governance

All the details in full, along with photos of the winners, will appear in an extended feature in the December issue of AsianInvestor magazine.

Governance
Government Pension Investment Fund

While doubts linger about the depth of Japan Inc’s commitment to improving corporate governance, the $1.1 trillion Government Pension Investment Fund (GPIF) has shown it is determined to make its mark.

Market experts say GPIF deserves recognition for attempting to demonstrably improve its governance. President Norihiro Takahashi talks about creating a virtuous circle by formalising the fund’s principles on issues such as proxy voting and creating effective dialogue with companies.

It’s not just talk. In April this year, the pension fund completed a survey of 400 Japanese companies to examine their relationship with external asset managers who own their stock. At the same time, the pension fund is encouraging external managers to improve their governance to prevent conflicts of interest.

The organisation is also beefing up its ESG monitoring activities. It established a new division within its public markets investment department this year, which focuses on stewardship and ESG. This followed its adoption of Japan’s Stewardship Code in 2014 and signing of the UN’s Principles of Responsible Investment (PRI) in September last year. GPIF CIO Hiromichi Mizuno was appointed a member of UN PRI’s board in November.

Moreover, this September, the GPIF hosted the first meetings of the Business and Asset Owners’ Forum and the Global Asset Owners Forum, which it convened to teach Japanese pension executives how to emulate ESG practices adopted in the US and Europe.

These moves are part of a wider programme to improve GPIF‘s investment capabilities, including enhancing internal controls and risk management structures. The fund has also introduced a performance-based fee structure for active managers, replacing its fixed-fee approach. What’s more, in its selection process it has given more weight to the investment processes of external managers, not just focusing on performance.

Given GPIF’s leadership position in Japan’s pension industry, its drive towards best practice in ESG should will likely – and should – be emulated.

Environmental, social and governance capabilities

When it comes to following up on stated goals, New Zealand’s NZ$31 billion ($22 billion) sovereign wealth fund walks the talk.

The fund’s oversight and accountability, the clarity of roles between the investment committee and management, and the robustness of its processes should serve as inspiration for other sovereign funds.

As the most recent host of the global forum of sovereign wealth funds, NZ Super and its chief executive Adrian Orr have been strong proponents of the Santiago Principles, the international standards of good governance for such institutions.

This year, the fund commissioned consultancy EY to undertake a report on its self-assessed compliance with the Santiago Principles, the first such assurance report to have been undertaken globally. The report found NZ Super had accomplished its goals admirably.

This principled approach is being extended, with the fund running various workshops for staff against the backdrop of a wider rollout of diversity, inclusiveness and flexible work policy initiatives.

While the overall objective is to maximise returns and reduce risk to the investment portfolio, NZ Super feels it can best do this by empowering its staff. They have tailored development plans that combine short- and long-term aspirations, set specific objectives and align individual developmental activities with the fund’s strategic objectives. This has helped foster a culture where debate is viewed as constructive and group-think avoided.

ESG screens are applied across 100% of NZ Super’s equity portfolio, with the findings used to inform its engagement efforts. A particular focus has been the establishment of the New Zealand Corporate Governance Forum. Launched last year, it provides a reference point for board composition, remuneration and disclosure of local companies.

Most recently, NZ Super announced it would introduce exclusionary investment rules to cut its exposure to energy companies deemed vulnerable to rule changes around carbon emissions. The new strategy will be applied across the fund's entire portfolio.

Additionally, NZ Super Fund's trustees, the Guardians of NZ Superannuation, will incorporate climate change considerations into decisions such as valuation models, risk allocation and manager selection.

This admirable level of forward-thinking would surely benefit asset owners of any size, in any market.

Write-ups already published (and what they were awarded for):